In re Ealy

• Decision Date: 24 February 2004
• Docket Number: No. 4:03-BK-23535E.,4:03-BK-23535E.
• Parties: In re Harmon G. EALY and Robin Y. Ealy, Debtors.
• Court: United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Eastern District of Arkansas

307 B.R. 653

In re Harmon G. EALY and Robin Y. Ealy, Debtors.

No. 4:03-BK-23535E.

United States Bankruptcy Court, E.D. Arkansas, Little Rock Division.

February 24, 2004.

Sheila F. Campbell, Sheila Campbell, P.A., Little Rock, AR, for Debtors.

John Richard Peel, Russellville, AR, for Creditor.

Joyce B. Babin, Chapter 13 Trustee.

FINAL ORDER REGARDING AUTOMATIC STAY

AUDREY R. EVANS, Chief Judge.

On December 17, 2003, the Debtors filed an "Amended Application for Ex Parte Temporary Restraining Order and Fixing Date for Hearing on Preliminary Injunction and Brief in Support." The Court entered its "Order Granting Temporary Restraining Order and Setting Date for Hearing on Preliminary Injunction" on December 17, 2003, which set the date for hearing on the Debtors' request for a preliminary injunction for December 29, 2003. Counseling Associates, Inc. (the "Creditor") filed its response to the Debtors' Application on December 24, 2003. The Court held a hearing on the Debtors' request for a preliminary injunction on December 29, 2003, which was consolidated with a trial on the merits. Sheila Campbell appeared on behalf of the Debtors, who were also present; John Richard Peel appeared on behalf of the Creditor; and Jeffrey Ellis appeared on behalf of the Chapter 13 Trustee, Joyce B. Babin. The Court took the matter under advisement and orally ruled that the automatic stay would remain in place until the Court entered its final ruling with respect to this matter. The Court entered an order to that effect on January 2, 2004. An order clarifying the issues under advisement and offering the parties the opportunity to file briefs was entered on February 3, 2004. Creditor filed a letter brief on February 5, 2004, and Debtors filed a response on February 12, 2004.

This dispute requires the Court to determine whether the Debtors have an equitable interest in real property on which joint Debtor Robin Ealy operates a child care center (the "Property") such that the automatic stay prevents Creditor from taking possession of the Property. This is a core proceeding under 28 U.S.C. § 157(b)(2), and the Court has jurisdiction to enter a final judgment in this case.

FACTS

The Debtors filed a voluntary Chapter 13 petition and plan on November 10, 2003. Joint Debtor Robin Ealy ("Ealy") has operated a child care center called "Little Stars Child Care and Early Education Learning Center" as a sole proprietorship since November 3, 1998. Ealy formed "Little Stars Child Care, LLC" (hereinafter referred to as "Little Stars LLC") on May 1, 2003. The child care center is currently located at 1622 North Donaghey, Conway, Arkansas.

In 2003, Ealy contacted Phillip Heigel of Sperry Van Ness Properties to assist her in finding new property on which to relocate her child care center. Glen Raga with Coldwell-Bankers, Advantage Realty, had the Property listed for Creditor, the Property's owner. Through Heigel, Ealy made an offer to purchase the Property for $170,000.00 which Creditor accepted, provided Debtors make a $20,000.00 down payment. Creditor agreed to finance the remainder of the purchase price. The Real Estate Contract which memorialized the parties' agreement listed the "Buyer" as Little Stars Child Care, LLC, and Creditor as "Seller." However, the contract was signed by the Debtors on April 23, 2003, a week before Little Stars LLC was even formed. Ealy testified that it was her understanding that in order to close on the Property, her business needed to be an LLC rather than a sole proprietorship. Ealy testified that she formed Little Stars LLC in order to close on the Property. More specifically, Ealy testified:

Well, I was told by the representative of Sperry Van Ness that Counseling Associates was requiring us, we needed to have an LLC, and he said that we needed to have it before we went to closing, so I asked where did I get an LLC from, and he said had to get through the state building in Little Rock; and I found out the location; and my daughter and [I] drove down to Little Rock and did the paperwork and paid the $50 and got the paperwork so we would have it in time for the closing at Lender's Title the next morning.

The closing was scheduled for and occurred on May 2, 2003. In connection with the closing, the Debtors executed a promissory note and mortgage in favor of Creditor; the Debtors signed both documents individually and as members of the LLC. Additionally, the Mortgage refers to Little Stars LLC and the Debtors collectively as "Mortgagor," and the promissory note refers to Little Stars LLC and the Debtors collectively as "Maker." The documents do not reflect that the Debtors executed the documents merely as guarantors; nor is there any mention of the Debtors personally guaranteeing a loan to Little Stars LLC in either document. Creditor executed a Warranty Deed on May 2, 2003, deeding its interest in the Property solely to Little Stars LLC with no mention of either Debtor. The Property's title commitment also lists Little Stars LLC as the sole owner of the Property.

Betty Sue Riddle, employed by Lender's Title Company, testified that she reviewed the title search on the Property and that title was vested in Little Stars LLC. She also testified that the order they received which started the title search procedure listed the buyer's name as "Little Stars Child Care," and that they were also presented with a copy of the Real Estate Contract which listed the buyer as "Little Stars Child Care, LLC." On cross-examination, Riddle was asked whether she knew if Little Stars LLC existed at that time, and she replied:

At that point, we don't, but during our search we check out with the Secretary of State's Office to see if they're in good standing and I found that they weren't, so one of my requirements on my commitment was to furnish us — I'll give you directly what it was here. To furnish a resolution of the Board of Directors — Excuse me. To furnish us copies of the articles of Organization, Little Stars Child Care, LLC and proof that they're in good standing with the State of Arkansas.

Riddle testified that Raga provided her with the Real Estate Contract and the request order. Riddle testified that she did not ask Debtors how they wanted to title the Property. Ealy testified that no one asked her how she wanted the Property titled, and she did not tell Creditor that she did not want the Property in her name, but that it was her understanding that she, her husband, and their business would own the Property. Darla Sherry, Special Projects Director for Creditor, testified that Creditor did not require the Debtors to take title to the Property in the name of an LLC. She stated that it made no difference to Creditor whether or not the buyer was an individual or an LLC, and that Creditor has no policy of requiring property to be transferred only to companies or LLCs.

After purchasing the Property and relocating the child care center, the Debtors defaulted under the terms of the Promissory Note. Creditor foreclosed on the Property as provided by the terms of the Mortgage. A default Foreclosure Decree was entered on October 14, 2003, granting judgment against Little Stars LLC and the Debtors. The Decree appointed the Faulkner County Circuit Clerk as Commissioner in Chancery to hold a foreclosure sale of the mortgaged realty. The foreclosure sale was held on November 14, 2003, a day after the Debtors filed for relief under Chapter 13. At the sale, Creditor bid in the amount of its judgment lien and received the Property. An Order Confirming the Sale was subsequently entered on November 20, 2003. A Commissioner's Deed was executed by the Clerk and recorded on November 20, 2003. The Creditor had a Writ of Assistance issued on December 11, 2003, and the Debtors allege that Martin Montgomery, Sheriff of Faulkner County, through his deputy, has attempted to execute the Writ of Assistance and was going to padlock the child care center on December 17, 2003, unless Debtors obtained a temporary restraining order.

DISCUSSION

The Debtors assert that they have an equitable interest in the Property such that the automatic stay prevents Creditor from completing the foreclosure process and obtaining possession of the Property. The Creditor maintains that because the Property is titled solely in the name of Little Stars, LLC, the Debtors have no interest in the Property individually that is protected by the automatic stay arising due to their Chapter 13 bankruptcy filing. In its letter brief, the Creditor further argued that the only equitable interest asserted by the Debtors is their signature on the...