In re Bay Vista of Virginia, Inc., Case No. 07-71213-SCS (Bankr. E.D.Va. 2/2/2009)

Decision Date02 February 2009
Docket NumberAPN 08-7046-SCS.,Case No. 07-71213-SCS.
CourtU.S. Bankruptcy Court — Eastern District of Virginia
PartiesIn re: BAY VISTA OF VIRGINIA, INC., Chapter 7, Debtor. TOM C. SMITH, JR., CHAPTER 7 TRUSTEE, Plaintiff, v. F. WAYNE McLESKEY, JR., McLESKEY and ASSOCIATES, LLC, Defendants.
STEPHEN C. ST. JOHN, Bankruptcy Judge

This matter came on for hearing upon the Motion to Dismiss ("Motion") filed by the Defendants, F. Wayne McLeskey, Jr. and McLeskey and Associates, LLC (collectively referred to as "McLeskey"), seeking to dismiss Counts One, Two, and Three of the Complaint which commenced the above-captioned adversary proceeding. The Complaint was filed by Tom C. Smith, Jr., the Chapter 7 Trustee ("Trustee") for the Debtor, Bay Vista of Virginia, Inc. ("Bay Vista"), and is composed of three separate counts.

In connection with the determination of an earlier Motion for Abstention filed by McLeskey, this Court entered an order holding that Counts One, Two, and Three of the Trustee's Complaint were not "core proceedings" within the definition of 28 U.S.C. § 157(b)(2), but were "otherwise related to" the case for purpose of 28 U.S.C. § 157(c)(1). A Memorandum Opinion memorializing the reasoning of the Court's denial of the Motion for Abstention was simultaneously issued. See Tom C. Smith, Jr., Chapter 7 Trustee v. F. Wayne McLeskey and McLeskey and Associates, LLC (In re Bay Vista of Virginia, Inc.), 394 B.R. 820 (Bankr. E.D. Va. 2008) (hereinafter In re Bay Vista). Consequently, while this Court may hear proceedings related to those counts, the Court may only make proposed findings of fact and conclusions of law as to those proceedings. 28 U.S.C. § 157(c)(1) (2008). The United States District Court shall enter any final order or judgment after considering this Court's proposed findings and conclusions and after reviewing those matters to which any party has timely and specifically objected. Id. McLeskey seeks dismissal of the three counts of the Complaint on the basis that the counts fail to state a claim upon which relief may be granted, making this motion pursuant to Federal Rule of Civil Procedure 12(b)(6), which is made applicable to this case by Federal Rule of Bankruptcy Procedure 7012(b). After examining the parties' pleadings and after hearing oral argument on the Motion to Dismiss on December 17, 2008, the Court recommends the following proposed conclusions of law with respect to the Motion to Dismiss.

The Allegations of the Complaint

The allegations made by the Trustee in the Complaint were examined extensively in In re Bay Vista. See In re Bay Vista, 394 B.R. at 824-27. The Complaint stems from a foreclosure sale conducted by McLeskey of certain real property located in Virginia Beach, Virginia ("Bay Vista Property") consisting of a residential condominium project. In conducting the foreclosure, McLeskey foreclosed upon certain deeds of trust securing the repayment of three notes made by Stanley Tseng and the Tseng Trust and a fourth note made by Bay Vista (collectively, the "McLeskey Notes"). The contentions of the Complaint were summarized as follows:

The Trustee filed his Complaint against the McLeskey Defendants on April 16, 2008. The Complaint seeks the recovery of money allegedly belonging to the Debtor's estate and, according to the Trustee, therefore qualifies as an "adversary proceeding" pursuant to Rule 7001(1) of the Federal Rules of Bankruptcy Procedure.

The factual allegations of the Complaint of the Trustee are as follows. Prior to the commencement of this Chapter 7 case, Bay Vista was the owner of a 1.075-acre parcel of real property located in Virginia Beach, Virginia, and commonly known as 3800 Dupont Circle (the "Property"), which was dedicated as a residential condominium development project. The Trustee alleges Bay Vista acquired title to the Property in or about February 2005 by deed from Mr. Stanley F. Tseng, in his capacity as trustee of the Tseng Trust Agreement No. 2. As of the Petition Date, the interest of Bay Vista in the Property was subject to three Deed of Trust liens in favor of Mr. McLeskey and a fourth Deed of Trust lien in favor of McLeskey and Associates, LLC (collectively, the "McLeskey Liens"). Each of the McLeskey Liens secured the repayment of certain corresponding loan indebtedness, which was evidenced by four note instruments (collectively, the "McLeskey Notes").

Due to the apparent default of Bay Vista of its repayment obligations under the McLeskey Notes, the McLeskey Defendants directed that a foreclosure sale (the "Foreclosure Sale") of the Property be noticed, advertised, and conducted by Samuel I. White, P.C. (the "Foreclosure Trustee"), on October 6, 2005. The state court saga of Bay Vista apparently commenced when Mr. Hung-Lin Wu and the Wu Trust (collectively, the "Wu Parties") filed a bill of complaint to enjoin the Foreclosure Sale in the Circuit Court for the City of Virginia Beach, Virginia ("State Court"). The State Court declined to enjoin the Foreclosure Sale and ordered that the proceeds of the Foreclosure Sale remaining after payment to the McLeskey Defendants be placed in escrow pending the State Court's resolution of the extent, validity, and priority of any other liens on the Property. The Foreclosure Sale was conducted on October 6, 2005.

Following active bidding at the Foreclosure Sale, Mr. McLeskey was the last and highest bidder for the Property, having submitted a winning bid in the amount of $5 million. Mr. McLeskey assigned his winning bid, and the associated right to purchase the Property, to Bay Vista Properties, LLC ("BVP"). On or about November 14, 2005, BVP paid to the Foreclosure Trustee the balance of the $5 million bid amount, and on November 17, 2005, BVP recorded its deed to the Property. Under Virginia law, the Foreclosure Trustee was required to disburse the $5 million Foreclosure Sale proceeds in the following order:

first, to discharge the expenses of executing the trust, including a reasonable commission to the trustee; secondly, to discharge all taxes, levies, and assessments, with costs and interest if they have priority over the lien of the deed of trust, including the due pro rata thereof for the current year; thirdly, to discharge in the order of their priority, if any, the remaining debts and obligations secured by the deed, and any liens of record inferior to the deed of trust under which sale is made, with lawful interest; and, fourthly, the residue of the proceeds shall be paid to the grantor or his assigns. . . .

See Va. Code Ann. § 55-59.4(A)(3) (2008).

The Trustee additionally alleges that, on or about February 27, 2006, the Foreclosure Trustee filed with the appropriate Virginia Beach Commissioner of Accounts a First Account of Foreclosure Sale Under Deed of Trust (the "Accounting"), disclosing the disbursements made by the Foreclosure Trustee of the Foreclosure Sale proceeds. According to the Accounting, the expenses of the Foreclosure Sale totaled $37,522.30; the delinquent and prorated real estate taxes attributable to the Property as of the date of the Foreclosure Sale totaled $31,334.88; and the combined payoff on the McLeskey Notes (the "McLeskey Payoff") totaled $4,054,927.50. A balance of $876,215.32 (the "Surplus Funds") was apparently available for distribution to the Debtor pursuant to its status as "grantor" with respect to each of the McLeskey Liens.

The Trustee additionally alleges that, notwithstanding the requirements of the Code of Virginia, the Foreclosure Trustee did not disburse the Surplus Funds to Bay Vista, but instead interpleaded those funds into the State Court at the direction of the Virginia Beach Commissioner of Accounts ("Interpleader"). . . .

. . . .

The Trustee asserts the McLeskey Defendants had not issued to Bay Vista any demand for payment, had not treated the underlying obligations as due, and had not issued any formal declaration of default under any of the McLeskey Notes as of October 1, 2003, nor had they ever exercised their discretionary option to invoke the default rate of interest under the McLeskey Notes. Accordingly, the Trustee asserts that $3,514,293.87 correctly reflects the total aggregate balances outstanding under the McLeskey Notes. . . .

In re Bay Vista, 394 B.R. at 824-27 (footnote omitted).1

The three counts of the Complaint of the Trustee were summarized as follows:

Count One of the Complaint is entitled "Turnover of Property." This count alleges that the Trustee, in his capacity as Chapter 7 Trustee for Bay Vista's estate, has the power to receive and collect on behalf of Bay Vista's estate property belonging to Bay Vista or its value pursuant to 11 U.S.C. § 542, and that under the terms of the McLeskey Notes and of the deed of trust instruments evidencing the McLeskey Liens, Bay Vista is "entitled to recover from the Foreclosure Trustee all sums overpaid on the McLeskey Payoff [in the amount of] $540,633.63." Complaint ¶ 43.

Count Two of the Complaint is entitled "Breach of Contract." The Trustee asserts the McLeskey Defendants breached their contractual duty to Bay Vista under the McLeskey Notes (i) by presenting to the Foreclosure Trustee an incorrect and overstated payoff based upon a retroactive computation of the default rate of interest and late charges; and (ii) by accepting disbursement from the Foreclosure Trustee of such higher portion of the Foreclosure Sale proceeds. The Trustee asserts that, in his capacity as Chapter 7 Trustee, he holds certain "strong-arm" powers specified in 11 U.S.C. § 544(a), and that included among the strong-arm powers is the power and authority to enforce Bay Vista's breach of contract rights and remedies under the McLeskey Notes and to recover on behalf of Bay Vista's estate the overstated portion of the McLeskey Payoff, which is the amount of $540,633.63.

Count Three of the Complaint is entitled "Judicial Estoppel." Under...

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