In re Bay Vista of Virginia, Inc.

Decision Date24 September 2008
Docket NumberAdversary No. 08-7046-SCS.,Bankruptcy No. 07-71213-SCS.
Citation394 B.R. 820
CourtU.S. Bankruptcy Court — Eastern District of Virginia
PartiesIn re BAY VISTA OF VIRGINIA, INC., Debtor. Tom C. Smith, Jr., Chapter 7 Trustee, Plaintiff, v. F. Wayne McLeskey, Jr., McLeskey and Associates, LLC, Defendants.

Peter G. Zemanian, Zemanian Law Group, Norfolk, VA, for Plaintiff.

Jonathan L. Hauser, Troutman Sanders LLP, Virginia Beach, VA, for Defendants.

MEMORANDUM OPINION

STEPHEN C. ST. JOHN, Bankruptcy Judge.

This matter came on for hearing on August 13, 2008, upon the Motion for Abstention filed by the Defendants, F. Wayne McLeskey and McLeskey and Associates, LLC (collectively, the "McLeskey Defendants"), pursuant to 28 U.S.C. § 1334 ("Abstention Motion"), of the Complaint of Plaintiff Tom C. Smith, Jr., Chapter 7 Trustee ("Trustee") for Bay Vista of Virginia, Inc. This Memorandum Opinion constitutes the conclusions of law of this Court. For the reasons set forth herein, the Abstention Motion is denied.

I. The Complaint of the Trustee

This bankruptcy case was commenced by the Debtor, Bay Vista of Virginia, Inc. ("Bay Vista") by its filing of a voluntary petition on January 23, 2007, in the United States Bankruptcy Court for the Middle District of Florida (the "Florida Bankruptcy Court"), being designated as Case Number 07-00527-MGW. Ms. Lauren P. Greene (the "Florida Trustee") was appointed to serve as the Debtor's Chapter 7 Trustee while the case was pending in the Florida Bankruptcy Court. On June 6, 2007, the Florida Bankruptcy Court transferred venue of this Chapter 7 case to this Court. The Trustee was appointed to serve as Chapter 7 Trustee in the place of the Florida Trustee.

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")1 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 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 contends that the apparent purpose of the Interpleader was to enable the State Court to adjudicate competing claims to the Surplus Funds that were being asserted by (i) S.B. Ballard Construction Co. ("SBBCC"), an affiliate of BVP, and (ii) the Wu Parties. On February 19, 2008, this Court entered an order granting relief from the automatic stay pursuant to 11 U.S.C. § 362 to SBBCC, which permitted the State Court to continue the adjudication of the Interpleader and to determine the respective rights of SBBCC and the Wu Parties to the Surplus Funds from the Foreclosure Sale. The State Court issued a letter opinion on May 4, 2008, wherein it concluded that SBBCC had a valid mechanic's lien on the Property and had a claim to the Surplus Funds superior to the claim of the Wu Parties. An order to this effect was entered by the State Court on May 27, 2008. This Court is advised that the Wu Parties have appealed this decision of the State Court to the Supreme Court of Virginia.

In this Court on September 15, 2007, the Trustee filed a Complaint against BVP, SBBCC, and the Wu Parties to (i) Avoid Transfers, (ii) Challenge Validity, Priority, and Extent of Liens and/or, alternatively, (iii) to Set Aside Foreclosure Sale, being designated in this Court as Adversary Proceeding No. 07-7076-SCS (the "Ballard/Wu Adversary Proceeding"). Among the various items of relief requested by the Trustee in the Ballard/Wu Adversary Proceeding was a motion for turnover of the Surplus Funds. The Trustee reached a settlement with BVP and SBBCC in the Ballard/Wu Adversary Proceeding, pursuant to which the parties established a procedural framework for resolving in the State Court the disputed claims of SBBCC to the Surplus Funds. The Trustee has not yet settled the disputed claims of the Wu Parties to the Surplus Funds, but this Court directed that any adjudication of such disputes be postponed pending a final, unappealable ruling by the State Court in the Interpleader.

The Trustee represents that the terms of his partial settlement with BVP and SBBCC and the deferred adjudication of the issues relating to the Wu Parties are set forth in an Order Approving Settlement and Compromise (the "Ballard Settlement Order") entered in the underlying bankruptcy case and the Ballard/Wu Adversary Proceeding on February 20, 2008. Included among the terms contained in the Ballard Settlement Order is SBBCC's qualified relinquishment to the Trustee (on behalf of Bay Vista's estate) of any and all potential lien rights or interests that SBBCC may hold that are inconsistent with the estate's ability to pursue recovery of the McLeskey Payoff, or any portion thereof.

The Trustee contends that any future reduction of the $4,054,927.50 amount of the McLeskey Payoff will yield a dollar-for-dollar increase in the amount of the Surplus Funds available to Bay Vista's estate, and accordingly, Bay Vista has a contingent property interest in the possible recovery from the McLeskey Defendants of any overstated portion of the McLeskey Payoff. The Trustee asserts that the $4,054,927.50 amount remitted by the Foreclosure Trustee for satisfaction of the McLeskey Notes was overstated by $540,633.63. The Trustee believes that the basis for the assertion by the McLeskey Defendants of the correctness of the original amount of the Surplus Funds is that each of the McLeskey Notes provides to the holder a discretionary right to assess a default rate of interest.2

The Trustee asserts the McLeskey Defendants had not issued to Bay Vista any demand for payment, had not treated the underlying obligations as...

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