In re 201 Forest Street LLC

• Citation: 409 B.R. 543
• Decision Date: 30 June 2009
• Docket Number: No. 07-41768-JBR.,No. 07-42296-JBR.,Adversary No. 07-4097.,07-42296-JBR.,07-41768-JBR.
• Parties: In re 201 FOREST STREET LLC & 219 Forest Street LLC, Debtors. 201 Forest Street LLC, 201 Forest Street Realty Trust, 219 Forest Street LLC, & 219 Forest Street Realty Trust, Plaintiffs, v. LBM Financial LLC & Marcello Mallegni, Defendants.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

Page 543

409 B.R. 543

In re 201 FOREST STREET LLC & 219 Forest Street LLC, Debtors 201 Forest Street LLC, 201 Forest Street Realty Trust, 219 Forest Street LLC, & 219 Forest Street Realty Trust, Plaintiffs, v. LBM Financial LLC & Marcello Mallegni, Defendants.

Nos. 07-42296-JBR, 07-41768-JBR.

Adversary No. 07-4097.

United States Bankruptcy Court, D. Massachusetts, Central Division.

June 30, 2009.

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Charles R. Bennett, Jr., Christopher M. Condon, D. Ethan Jeffery, Philip H. Graeter, Hanify & King, P.C., Boston, MA, for Plaintiffs.

Jeffrey D. Ganz, Meegan Casey, Riemer & Braunstein LLP, Boston, MA, Kevin C. McGee, Seder & Chandler, LLP, Worcester, MA, Philip F. Coppinger, Leamar Industries, Inc., Marlborough, MA, for Defendants.

MEMORANDUM OF DECISION

JOEL B. ROSENTHAL, Bankruptcy Judge.

This matter came before the Court for trial on the Plaintiffs'¹ Objection to LBM Financial LLC's ("LBM") Claims and Counterclaims² against Defendants LBM and Marcello Mallegni ("Mallegni"). Counts I, III, & IX seek the disallowance of default rates of interest as unenforceable penalties. Counts II & IV seek declaratory judgments as to amounts owed on certain promissory notes. Count V requests the equitable subordination of LBM's claims. Counts VI, X, & XII allege unfair and deceptive acts or practices in violation of Mass. Gen. Law ch. 93A.³ Count VIII seeks a declaratory judgment that a guaranty executed by 201 Forest is void. Count XI alleges breaches of the covenant of good faith and fair dealing.⁴ The basis of the Objection to LBM's claims is the same facts and conduct that form the basis of the Plaintiffs' Counterclaims. Accordingly, the Objection to Claims will be sustained insofar as the Court finds for the Plaintiffs on their Counterclaims.

In reaching this decision, the Court considered the demeanor and credibility of the nine witnesses who testified as well as the seventy-one exhibits that were admitted into evidence and the arguments and submissions of counsel. This decision constitutes the Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.

It is appropriate to begin with a few words about credibility. The Court did not find Mallegni to be a credible witness. When faced with a difficult question Mallegni invariably responded that he could not recall. See Tr., Nov. 3, 2008, p. 75 (could not recall whether there was dispute over accuracy of payoff figures); p. 69-70 (could not recall what input he had when setting default rates); p. 84 (could not recall what factors he looked at when he set default rates). Moreover, Mallegni also testified inconsistently at times. See Tr., Nov. 3, 2008, pp. 132-133 (he knew Norris was asking a for lease release; he "never" knew); pp. 105, 176 (LBM has only foreclosed one or two times; LBM has foreclosed four or five times between 2001 and 2004 alone). As a result, the Court has rejected much of Mallegni's testimony.

The parties' relationship is over a decade old and involved several loans. The following overview of the tumultuous history shared by the parties will provide a helpful introduction.

I. INTRODUCTION

A. The Debtors

In 1997, 219 Forest acquired undeveloped property known as 219 Forest Street, Marlborough, Massachusetts (the "219 Forest Property"). 219 Forest Street Realty Trust is managed by two brothers, David Depietri ("David") and Robert Depietri ("Robert"). David is the trustee of 219 Forest Street Realty Trust of which 219 Forest Street LLC, a Massachusetts Limited Liability Company, is the sole beneficiary. At its inception, David and Kimberly Depietri ("Kimberly") each owned 50% of 219 Forest. Robert has never owned an interest in 219 Forest, but he makes all of its major business decisions.

201 Forest is an entity that owns two office buildings with approximately 79,000 square feet of rentable space adjacent to the 219 Forest Property. David is the trustee of 201 Forest Street Realty Trust of which 201 Forest Street LLC, a Massachusetts Limited Liability Company, is the sole beneficiary. David is the authorized agent of 201 Forest Street LLC. There was no evidence presented concerning the ownership of 201 Forest.

B. The Origin of 219 Forest's Relationship with Mallegni

The relationship between 219 Forest and Mallegni began on August 5, 1998 when Wolfpen Financial, LLC ("Wolfpen"), and Clinton Management Corp. ("Clinton Management") made a $1,200,000 loan to 219 Forest (the "August Note"). See Pls.' Agreed Ex. 2.⁵ At that time, Mallegni and William Depietri ("William") each owned 50% percent of Wolfpen, see Tr., Nov. 3, 2008, p. 52, but only Mallegni was involved in its management. William is a brother of Robert and David, but he is not affiliated with 219 Forest and is not a party to this litigation. William also owns several other companies including Rosewood Capital Corporation, a private lending company. See Tr., Nov. 7, 2008, p. 46. Both Wolfpen and Clinton Management were payees of the August Note; the Court finds each had a 50% interest, although the loan documents introduced into evidence are silent on this point. See Pls.' Agreed Ex. 2. Wolfpen's ledger, wherein Wolfpen appeared to track 50% of the August Note, supports this finding. See Defs.' Ex. 5.⁶ The August Note called for interest only payments at rate of 15% per annum and had a maturity date of February 5, 1999. See Pls.' Agreed Ex. 2. 219 Forest had the right to extend the August Note for six months in exchange for a fee of 3% of the then outstanding balance to be paid at the end of the extension period. Id. In the event of default, the August Note provided that the interest rate would increase to 18% and two points on the then outstanding balance would be due and payable to the lender. Id.

The August Note was not paid off on February 5, 1999. Robert testified that 219 Forest was current with its monthly interest payments at this point and paid Wolfpen the 3% fee necessary to extend the term of the August Note for six months. See Tr., Nov. 5, 2008, pp. 110-111; Tr., Nov. 7, 2008, p. 12. Wolfpen's ledger corroborates this testimony as it reflects that Wolfpen received an $18,000 payment from 219 Forest (half of the 3% extension fee) on February 4, 1999. See Defs.' Ex. 5.⁷ This extended the term of the August Note to August 5, 1999 and as is discussed below, the amount needed to repay the August Note was contested.

C. Wolfpen Acquires 40% of 219 Forest and a Veto Power

Apparently pursuant to an agreement to which Robert testified but which, if it was reduced to writing, was not offered in evidence, David and Kimberly each transferred a 20% interest in 219 Forest to Wolfpen on April 26, 1999. See Tr., Nov. 5, 2008, pp. 110, 114; Pls.' Agreed Exs. 4-5. Robert testified that "Wolfpen had an option to acquire 40 percent of the property prior to the expiration of the [August] [N]ote or be paid [a] $100,000 exit fee upon expiration of the note."⁸ See Tr., Nov. 5, 2008, p. 110. Mallegni testified, however, that Robert simply "gave" the 40% interest to Wolfpen because it had "put up money and [ ] help[ed] them with the loans," but he could not remember if Wolfpen had given any other consideration beyond the loans. See Tr., Nov. 3, 2008, pp. 63-65.

The Court does not find Mallegni's version credible as there was no evidence that the parties to this litigation were ever exchanging "gifts," nor is it credible that the owners of 219 Forest would give away almost half of the company at a time when 219 Forest had already obtained an extension of the August Note and was current on its interest payments. The transfers were made in lieu of a cash "exit fee." As a result of these transfers, Kimberly and David each owned 30% of 219 Forest, and Wolfpen owned 40% of 219 Forest. Curiously, Wolfpen's 50% owner, William, was not aware that Wolfpen acquired 40% of 219 Forest. See Tr., Nov. 7, 2008, p. 78. These transfers were significant, to say the least, as 219 Forest's LLC agreement was structured in a manner that prevented 219 Forest from entering into any financing transaction unless it first procured the assent of its then lender and its new 40% owner, Wolfpen. See Tr., Nov. 5, 2008, p. 204 ("The way the partnership was structured it took more than 60% to approve any financing transaction, and [Mallegni] had the deciding vote."). It was not contradicted at trial that Wolfpen's interest in 219 Forest provided it with this veto power. Wolfpen's acquisition of this veto power dramatically shaped the dealings that unfolded between 219 Forest and Mallegni over the next six and a half years.

D. The Wolfpen and Hudson Notes

At or around the time that the August Note extension was set to expire, a principal of Clinton Management arrived at David and Robert's office with a gun and demanded to be repaid. See Tr., Nov. 5, 2008, pp. 198-199. The principal of Clinton Management was accompanied by Mallegni during this visit. In response to this pressure, 219 Forest obtained loans from Hudson Savings Bank and Wolfpen on September 1, 1999 to pay off the August Note. The purported payoff on the August Note, $1,311,015.00, was much higher than what Robert believed 219 Forest owed. See Tr., Nov. 5, 2008, p. 116.

The Hudson Savings Bank loan was in the amount of $650,000 (the "Hudson Note"). See Pls.' Agreed Ex. 6. After closing costs and real estate taxes, which totaled $49,381.60, were deducted, $600,618.40 was applied to the $1,311,015.00 alleged balance of the August Note. See Defs.' Ex. 6. According to the Hudson Note closing statement, $710,396.60 remained owing on the August Note after the Hudson Note proceeds were applied. Id. Although Robert objected to this amount, 219 Forest...