In re Captran Creditors Trust, Bankruptcy No. 85-0045-8P1

• Decision Date: 04 April 1990
• Docket Number: Bankruptcy No. 85-0045-8P1,Adv. No. 87-158.
• Parties: In re CAPTRAN CREDITORS TRUST, Debtor. CAPTRAN CREDITORS TRUST, Club Baha, Ltd., a foreign corporation and Tropical Properties, Ltd., a foreign corporation, Plaintiffs, v. David McCONNELL, Gerald McHale, and McHale, Ezzell and Co., a Florida professional association, Defendants.
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Middle District of Florida

114 B.R. 753 (1990)

In re CAPTRAN CREDITORS TRUST, Debtor CAPTRAN CREDITORS TRUST, Club Baha, Ltd., a foreign corporation and Tropical Properties, Ltd., a foreign corporation, Plaintiffs, v. David McCONNELL, Gerald McHale, and McHale, Ezzell and Co., a Florida professional association, Defendants.

Bankruptcy No. 85-0045-8P1, Adv. No. 87-158.

United States Bankruptcy Court, M.D. Florida, Tampa Division.

April 4, 1990.

Malka Isaak, Tampa, Fla., Richard W. Epstein, for plaintiffs.

Francis H. Cobb, Charles W. Pittman, Tampa, Fla., for defendants.

FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION

ALEXANDER L. PASKAY, Chief Judge.

THIS is a confirmed Chapter 11 case, and the matter under consideration is a three-count Complaint by Captran Creditors Trust (CCT), Club Baha, Ltd. (Club Baha), and Tropical Properties, Ltd. (Tropical Properties) against David McConnell (McConnell), Gerald McHale (McHale), and McHale, Ezzell and Co., P.A. The Plaintiffs seek both compensatory and punitive damages in Count I based on the alleged breach of fiduciary duty owed to the Plaintiffs by Defendants McConnell and McHale. The Plaintiffs in Count II seek compensatory and punitive damages for the alleged professional negligence of Defendants McConnell and McHale. In Count III, the Plaintiffs seek damages and other relief from Defendants McConnell, McHale, and McHale, Ezzell, and Co. for their alleged violations of ch. 772 of the Florida Statutes.

Although Defendant McConnell failed to timely file an answer to the Plaintiffs' Complaint and a default was entered against him by the Clerk before this trial commenced, a final judgment was not entered against McConnell. Additionally, Count III of the Plaintiffs' Complaint was dismissed by Order of this Court after the conclusion of the evidence presented at the final evidentiary hearing. This leaves for consideration the claims set forth in Counts I and II of the Complaint, that is whether McHale is liable for damages based on a breach of fiduciary duty and based on alleged negligence of a professional.

This Court, having heard extensive testimony of witnesses and having considered the documentary evidence, together with the record, now finds and concludes as follows:

In 1982, Captran Resorts International, Inc. (CRI), a corporation based in Lee County, Florida, was engaged in the business of developing resorts and selling time-share interests to the public. At the same time, CRI through its president, Keith Trowbridge, entered into a joint venture with Club Baha and Tropical Properties, which were controlled by Jack Grabowski, for the development of a similar enterprise in the Bahamas. A disagreement between the parties resulted in litigation which ultimately concluded with a $1.7 million Final Judgment against CRI and its president, Trowbridge, and in favor of Club Baha and Tropical Properties. (Plaintiffs' Exh. No. 1.)

CRI, faced with the inability of satisfying the judgment and the possibility of losing some, if not all, of its property because it could not post a supersedeas bond, filed a voluntary Petition for Relief under Chapter 11 of the Bankruptcy Code in this court on July 16, 1982. Soon after CRI filed its bankruptcy petition, CRI and some of its largest creditors, including Club Baha and Tropical Properties, entered into extensive negotiations. The purpose of their negotiations was to ultimately satisfy CRI's creditors and to resolve CRI's problems outside of the provisions of Chapter 11 and the bankruptcy court. (Plaintiffs' Exh. No. 1.)

The negotiations resulted in an agreement which provided that the creditors of CRI would form a trust, Captran Creditors Trust (CCT). The assets of CRI, with one minor exception, were to be transferred to CCT to be the Trust res, and the creditors of CRI were to be the Trust beneficiaries. The Defendants McConnell, an attorney, and McHale, a certified professional accountant (CPA), were appointed as the initial Trustees for this newly created Trust. A copy of the Agreement, a synopsis of its development, and copies of related documents are included in what is referred to as "the yellow book." (Plaintiffs' Exh. No. 1.) The Agreement was finalized in December, 1982. Based on the settlement, this Court entered an Order granting CRI's Motion to Dismiss the Chapter 11 case of CRI on December 6, 1982.

The Agreement provided that CCT would acquire from CRI certain specified assets of CRI and would assume any debts and liabilities associated with those assets. The assets transferred to CCT would be marketed and sold, and the net proceeds of the sales would go to the Trust for the benefit of the Trust beneficiaries. Under the Agreement, CRI was to act as the marketing agent for the Trust properties and, as a condition of the Agreement, was to receive 38% of the sale price of the properties sold.

CRI did, in fact, act as the marketing agent for the Trust properties. All sales were through a real estate firm owned and controlled by Trowbridge, and they were processed through Northern American Title Insurance Agency, Inc. (NATIA), a title company also owned and controlled by Trowbridge. All sales records of the Trust properties were under the exclusive control of CRI's controller, George Mills (Mills), and there is no doubt that McHale accepted the recordkeeping of Mills without question or without any independent verification. NATIA handled all closings and maintained all of the records regarding the sales of timeshares. Evidence produced at trial leaves no doubt that neither McHale nor McConnell kept any records regarding the sales transactions; instead, they simply let Trowbridge and NATIA handle all of the details regarding the sales and recordkeeping of CRI.

The Agreement specifically described the Trustees' duties, powers, and liabilities. Regarding the Trustees' liability, the Agreement provided that "except for proven dishonesty, a Trustee shall not be personally liable for any act or omission in connection with his duties as Trustee." (Plaintiffs' Exh. No. 1 at p. 117.) (emphasis supplied) The Agreement further provided that the Trust was created "for the primary purpose of liquidating the assets transferred to it with no objective to continue or engage in the conduct in any trade or business."

Notwithstanding the stated purpose of the Trust, i.e., to liquidate the Trust assets, the evidence presented clearly established that CRI continued to develop and build on two of the undeveloped properties conveyed to the Trust by the Agreement. The record leaves no doubt that the Trustees agreed, at least tacitly, to this activity by CRI, and at no time voiced any objection to it. On the contrary, McHale consented to this development because he believed it would maximize the return to the beneficiaries of the Trust. It appears that even though the Trust Agreement did not authorize any additional development, this development produced a net benefit to the Trust to the extent of $1.7 million. (Defendant's Exh. No. 7.)

It further appears that both the Trustees and Grabowski attempted to sell all of the Trust assets in bulk, but were unable to find a buyer. (Defendant's Exhs. No. 51, No. 52.) To solve their dilemma, the Trustees developed a liquidation plan pursuant to which the Trust assets would be distributed in-kind to the beneficiaries of the Trust in exchange for extinguishing their beneficiary interest in the Trust. (Plaintiffs' Exh. No. 66.) However, CRI resisted in-kind distribution (Defendant's Exh. No. 6), and threatened to sue the Trustees if they proceeded with this plan. (Defendant's Exh. No. 6.) This resistance by CRI is understandable in light of a provision in the Agreement which preserved for CRI any residual interest in the Trust properties, if one remained after the liquidation of the Trust assets and after the satisfaction of the interest of the Trust beneficiaries.

In order to protect their position, the Trustees filed a suit for declaratory relief requesting that the Circuit Court of Lee County, Florida approve the in-kind distribution. The Trustees also sought a temporary restraining order to remove CRI as the marketing agent for the Trust assets; however, that request was...