Harbour East Dev. Ltd. v. 7935 NBV, LLC (In re Harbour East Dev. Ltd.)

• Decision Date: 27 October 2011
• Docket Number: Case No. 10-20733-BKC-AJC
• Citation: Harbour East Dev. Ltd. v. 7935 NBV, LLC (In re Harbour East Dev. Ltd.), Case No. 10-20733-BKC-AJC (Bankr. S.D. Fla. Oct 27, 2011)
• Parties: In re: HARBOUR EAST DEVELOPMENT, LTD., Debtor. HARBOUR EAST DEVELOPMENT, LTD., Plaintiff, v. 7935 NBV, LLC and MARIO EGOZI, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Florida

In re: HARBOUR EAST DEVELOPMENT, LTD., Debtor.HARBOUR EAST DEVELOPMENT, LTD., Plaintiff,

v.7935 NBV, LLC and MARIO EGOZI, Defendants.

Case No. 10-20733-BKC-AJC

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF FLORIDA MIAMI DIVISION

Dated: October 27, 2011

ORDERED in the Southern District of Florida on October 27, 2011.

A. Jay Cristol, Judge

United States Bankruptcy Court

MEMORANDUM OPINION GRANTING 7935 NBV, LLC'S MOTION TO DISMISS

ADVERSARY COMPLAINT

THIS MATTER came before the Court upon Defendant 7935 NBV, LLC's Motion to Dismiss Adversary Complaint [ECF No. 15] (the "Motion") and the Harbour East Development, Ltd.'s Response to Motion to Dismiss Adversary Complaint [ECF No. 25] (the "Response"). TheCourt, having reviewed the record in this adversary proceeding, the Motion, the Response, and the arguments of counsel, does GRANT the Motion for the reasons set forth below.

I. FACTUAL BACKGROUND

Harbour East Development, Ltd. ("Harbour East") or the "Debtor") is the developer and owner of the luxury residential condominium development known as Cielo on the Bay ("Cielo" or the "Property") located at 7935 East Drive, North Bay Village. Cielo contains 35 residential condominium units (the "Condominium Units").

As set forth in the Complaint, on December 28, 2005, Harbour East and Northern Trust Bank of Florida, N.A. ("Northern Trust") entered into that certain Construction Loan Agreement pursuant to which Harbour East borrowed $16,900,000 (the "Construction Loan") from Northern Trust. (Complaint at ¶ 21). Defendant Mario Egozi ("Egozi") personally guaranteed all obligations of Harbour East to Northern Trust pursuant to an absolute and unconditional payment guaranty (the "Guaranty").¹ Id.

Concurrently with the Loan Agreement, and in order to evidence the obligation to repay the Construction Loan, Harbour executed and delivered to Northern on or about December 28, 2005, a Promissory Note (the "Note") in the original principal amount of $16,900,000.

Concurrently with the Loan Agreement and the Note, Harbour executed and delivered to Northern a Mortgage, Security Agreement, Financing Statement, Fixture Filing, and Assignment of Rents (the "Mortgage"), which secured the total principal amount of $16,900,000. The Mortgage encumbers the Real Property, together with, among other things, all buildings, leases,rents, easements, rights, deposits, proceeds, awards, income, revenues, improvements, equipment, and fixtures thereon.

On or about December 21, 2009, Northern Trust sold the loan to NBV, as the designee of TMS FL 2, Inc., pursuant to that certain Loan Sale Agreement, dated as of December 21, 2009 (the "Loan Sale Agreement").

II. STANDARD OF REVIEW

"Under Federal Rule of Civil Procedure 8(a)(2), a pleading must contain a 'short and plain statement of the claim showing that the pleader is entitled to relief.'" Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009); see Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). "A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) should be granted if the plaintiff does not 'plead enough facts to state a claim to relief that is plausible on its face.'" Reese v. JPMorgan Chase & Co., 686 F.Supp.2d 1291, 1298 (S.D. Fla. 2009), quoting Twombly, 127 S.Ct. at 1974. "To do so, the plaintiff must include in the complaint more than 'a formulaic recitation of the elements of a cause of action.'" Id. The factual allegations must be enough to raise a right to relief above the speculative level. Id. citing Watts v. Fla. Int'l Univ., 495 F.3d 1289, 1295 (11th Cir. 2007). "Dismissal is appropriate where it is clear the plaintiff can prove no set of facts in support of the claims in the complaint. Accordingly, the court may dismiss a complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) when on the basis of a dispositive issue of law, no construction of the factual allegations will support the cause of action." Marshall Cty. Bd. of Educ. v. Marshall Cty. Gas Dist., 992 F.2d 1171, 1174 (11th Cir. 1993) (internal citations omitted).

III. DISCUSSION AND ANALYSIS

At bottom, the claims asserted in the Debtor's Complaint [ECF No. 1] (the "Complaint") are predicated upon the alleged breach by lender Northern Trust of the construction loan agreement and breach of an alleged fiduciary duty to its borrower, Harbour East. The factual allegations in the Complaint, however, are primarily focused on Mario Egozi, not Harbour East. Harbour East is a separate legal entity from Egozi that did not have a relationship with Northern Trust except as the borrower of the construction loan that funded construction of Cielo.

Throughout the Complaint, Harbour East blurs the distinction between itself and Egozi to assert claims that belong to and that are properly asserted solely by Egozi. Except through conclusory allegations that fail to satisfy the pleading standard set forth in Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007), Harbour East fails to plead with the requisite specificity that Northern Trust owed any duty to Harbour East (as opposed to Egozi) or that Northern Trust's conduct damaged Harbour East (as opposed to Egozi).

A. Harbour East Lacks Standing to Bring Claims that Solely Benefit Egozi.

It is clear from the face of the Complaint that Harbour East is seeking to subordinate NBV's claims for Egozi's benefit. Other than improving the priority of Egozi's claim, the subordination sought by Harbour East does not benefit any creditor other than Egozi.

In Enron, Judge Scheindlin suggests that the trustee only has standing to argue equitable subordination for the benefit of all creditors and for the estate's benefit, not on behalf of a subset of creditors or solely to advance one claim to the detriment of another. Enron Corp. v. Springfield Associates, LLC (In re Enron Corp.), 379 B.R. 425, 441-42 (S.D.N.Y. 2007). Here, the alleged wrongdoing was a setoff by Northern Trust against Egozi's IMA account. Actually, the estate appears to have benefitted from this setoff because it reduced the debt that HarbourEast owes to NBV. As a remedy for the alleged wrongdoing, however, the Debtor is seeking to substitute a subrogation claim in favor of Egozi for the claim of NBV. Based upon the reasoning in Enron, Harbour East has no standing to assert Egozi's alleged claims because the estate and its creditors generally benefitted from Northern Trustee's conduct.

B. Count I Fails to State Claims for Subrogation or Subordination.

Count I seeks to equitably subordinate NBV's secured claim against Harbour East to an alleged secured claim in favor of Egozi against Harbour East in the amount of $3,041,884.80.

1. Subrogation

In paragraph 96 of the Complaint, Harbour East requests that the Court allow a secured claim in favor of Egozi based upon the doctrine of equitable subrogation. The Complaint, however, does not plead facts supporting the elements of a claim for subrogation. To state an claim for equitable subrogation under Florida law, a plaintiff must demonstrate that (1) a payment was made to protect its own interest, (2) the payment was not voluntary, (3) the plaintiff was not primarily liable for the debt that was repaid, (4) the plaintiff paid off the entire debt, and (5) subrogation would not work any injustice to the rights of a third party. Fibreboard Corp. v. Celotex Corp. (In re Celotex Corp.), 472 F.3d 1318, 1323 (11th Cir. 2006) citing Dade Cty. Sch. Bd. v. Radio Station WQBA, 731 So.2d 638, 646 (Fla. 1999).

Although Harbour East alleges that Northern Trust "appropriated over $3 million of Egozi's assets in his IMA Account" and applied the proceeds "to pay off the Debtor's $2,100,000 line of credit and reduce the balance of the Construction Loan", Harbour East does not further state the required elements of an equitable subrogation claim in the Complaint. Complaint ¶ 72.

With respect to the portion of the $3 million that was allegedly applied by Northern Trust to satisfy the line of credit, even if the Court were to consider the repayment in full of the line ofcredit to be a separate obligation for purposes of subrogation, any right to subrogation arising from the repayment of the line of credit is Egozi's cause of action, not the Debtor's. Northern Trust allocated approximately $3 million of Egozi's personal funds to pay off the Debtor's line of credit.

Here, the question of subrogation centers on whether Egozi paid a debt for which he was primarily responsible or whether he was acting as a guarantor. Ultimately Harbour East has no standing to bring this claim. Egozi is the proper party to request subrogation to NBV.

Because the Complaint contained allegations that specifically preclude a successful claim for equitable subrogation under Eleventh Circuit law, Court I will be dismissed to the extent it seeks to state a claim for equitable subrogation.

2. Equitable Subordination

a. Elements of Equitable Subordination

The Court also dismisses Count I because it fails to state a claim for equitable subordination. To state a claim for equitable subordination, Harbour East must allege that (a) NBV has engaged in some type of inequitable conduct, (ii) the misconduct must has resulted in injury to the creditors of Harbour East or conferred an unfair advantage on NBV, and (iii) subordination of NBV's claim is not inconsistent with the Bankruptcy Code. Benjamin v. Diamond (In re Mobile Steel Corp.), 563 F.2d 692 (5th Cir. 1977). The Fifth Circuit, in a later case, expanded upon Mobile Steel, indicating that, while broad, equitable subordination is usually confined to three general paradigms: (1) when a fiduciary of the debtor misuses its position to the disadvantage of other creditors; (2) when a third party controls the debtor to the disadvantage of other creditors; and (3) when a third party actually defrauds other creditors. In re U.S. Abatement Corp., 39 F.3d 556, 561 (5th Cir. 1994).

b. Northern Trust Did Not Owe a Fiduciary Duty to Harbour East

The inequitable conduct alleged by Harbour...