In re Flamingo 55, Inc., BK-S-03-19478-BAM.

• Citation: 378 B.R. 893
• Decision Date: 17 October 2007
• Docket Number: No. BK-S-03-19478-BAM.,No. BK-S-03-25222-BAM.,BK-S-03-19478-BAM.,BK-S-03-25222-BAM.
• Parties: In re FLAMINGO 55, INC., Debtor. In re Vegas Townhome Partners, L.P., Debtors.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Nevada

378 B.R. 893

In re FLAMINGO 55, INC., Debtor In re Vegas Townhome Partners, L.P., Debtors.

No. BK-S-03-19478-BAM.

No. BK-S-03-25222-BAM.

United States Bankruptcy Court, D. Nevada.

October 17, 2007.

Thomas W. Harris, Jr., Law Office of Thomas W. Harris Jr., Newport Beach, CA, for Consolidated Debtor.

Jeffery D. Patterson, Kelly J. Brinkman, Goold Patterson Ales & Day, Las Vegas, NV, Mark Stern Norwalk, CT, for Petitioning Creditor.

Brian G. Dvorak, Las Vegas, NV, for Alleged Debtor.

Gregory Grantham, San Juan Capistrano, CA, John Saba, Santa Ana, CA, for Consolidated/Alleged Debtor.

Duane H. Gillman, Timothy S. Cory, Timothy S. Cory & Associates, Michael F. Thomson, Durham Jones & Pinegar, Las Vegas, NV, for trustee.

Edward G. Marshall, Las Vegas, NV, for Debtor.

OPINION ON TRUSTEE'S AND EMERALD GATE'S OBJECTION TO SUBROGATION CLAIM

BRUCE A. MARKELL, Bankruptcy Judge.

I. INTRODUCTION

Gregory Grantham and John Saba are two California attorneys who also jointly invest in businesses and real estate. After foreclosure of a California property in which they had an interest, they filed a claim in this bankruptcy.¹ That claim asserts that Nevada property owned the debtor, Flamingo 55, Inc. ("Flamingo 55"), also secured the claim satisfied by the California foreclosure. Accordingly, Grantham and Saba claim they are now subrogated to the foreclosing entity's claim against Flamingo 55.

Timothy Cory, the chapter 7 trustee ("Trustee"), and Emerald Gate Construction, Inc. ("Emerald Gate"), each objects to the claim on myriad grounds. After a review of the lengthy and convoluted record, this court sustains the Trustee's and Emerald Gate's objections, and disallows Grantham and Saba's claim.

II. FACTS — "OVER, UNDER, SIDEWAYS, DOWN"²

Grantham and Saba's claim originated with a failed limited liability company, Broadway-Acacia, LLC ("BA"). BA was organized in 1997. Its members were Grantham, Saba, Mervyn Phelan, Sr., Mervyn Phelan, Jr., and Craig Brown. Each member was to have a 20% interest, even though Grantham and Saba contributed 60% of the enterprise's funds. Case No. 03-19478, Docket No. 84, Memorandum of Points and Authorities p. 2 (May 28, 2004).

In late 1997, BA purchased property at 410 Broadway in Laguna Beach, California ("California Property") from the Resolution Trust Company for $500,000. BA later invested another $100,000 for renovations and improvements. This was a good investment; indications are that by 2001 the California Property's value had increased to almost $1.8 million due to the improvements and other work. Further, indications in the record show that BA may have refinanced the property and used a portion of the refinancing proceeds to invest in other real estate. Id

All would have been well but for the fact that Grantham and Saba had thrown their lot in with crooks. In May 2001, Brown, Phelan, Sr., and Phelan, Jr., caused BA to encumber its real estate. The purpose of this encumbrance was to allow another entity controlled by the Phelans and Brown to acquire land in Nevada. That entity, then known as Senior Care Homes, Inc.,³ formed a wholly-owned subsidiary to take title to the Nevada property. That subsidiary is the debtor in this case, Flamingo 55. Acting through Senior Care, the Phelans and others caused Flamingo 55 to acquire 54 unimproved lots in Las Vegas, Nevada (the "Nevada Property").⁴ Five hundred thousand dollars of the downpayment for the acquisition came from a $675,000 loan made by Datacom, Inc. ("Datacom"). Both BA and Flamingo 55 signed the note representing the loan. Datacom secured the note with a first deed of trust on the Nevada Property, and a second deed of trust on the California Property. The seller of the Nevada Property, an entity currently known as Emerald Gate, received cash and notes as consideration for the conveyance of the Nevada Property to Flamingo 55.⁵

All of the relevant parties also signed a "Cross-Collaterization Agreement" under which they all agreed that Datacom could look to any of its security in any order in case of a default. This included Phelan Jr. and Brown, BA's managing members. This document is additionally significant because it does not establish any particular priority in terms of payment, and does not use words of guaranty or any form of secondary liability to describe BA's role. After some delays, the transaction closed, with Flamingo 55 taking title to the Nevada Property.

Grantham and Saba allege that they did not learn of the Flamingo 55 transaction until after it occurred. They then reassessed their relationship with the Phelans and Brown and began various legal actions to attempt to unwind the deal.

One of the first successes in their campaign was a $4.5 million default judgment against Senior Care obtained on September 6, 2002. (Case No. 01CC10469, Orange County) ("Default Judgment"). Pursuant to the Default Judgment: "Broadway-Acacia, LLC"⁶ was recognized as a failed, de facto, Delaware limited liability company, and was held to be a general partnership; as so characterized, BA was dissolved; Saba was designated partner in charge of wrapping up BA's affairs; and Grantham and Saba were awarded the California Property.

Grantham and Saba then attempted to domesticate the Default Judgment in Nevada. In October 2002, even though Flamingo 55 was not a party to the Default Judgment, Grantham and Saba applied for a Nevada judgment based upon the Default Judgment. In an effort to evade this action, Phelan, Sr. caused Flamingo 55 to transfer the Nevada Property to Vegas Townhome Partners, L.P. ("VTP") on November 12, 2002. Senior Care, by then known as Investco, also executed a stock power for the general partner of VTP, Vegas Townhome Partners Management, Inc., in favor of Richfield Financial, LLC, an affiliate of Phelan and his cronies. Case No. 03-19478, Docket No. 84, Memorandum of Points and Authorities pp. 4-5 (May 28, 2004).

In May 2003, Grantham and Saba sued Flamingo 55, VTP, Senior Care and others alleging that the transfer to VTP was fraudulent as to them. In this lawsuit, Grantham and Saba took the position that they were creditors of Flamingo 55 as a result of the Default Judgment, and that, through the doctrine of reverse veil-piercing, the Nevada Property (after avoidance of the fraudulent transfer to VTP) should be encumbered to secure the debts owing under the Default Judgment.

For reasons that are not in the record, VTP transferred the Nevada Property to R.H. Construction and Red Rock Asset Trust on July 1, 2003; these latter two entities were controlled by Grantham and Saba. An involuntary chapter 7 bankruptcy case was then begun against Flamingo 55 on July 21, 2003; the court entered an order for relief on January 15, 2004. VTP commenced a voluntary chapter 11 case on December 12, 2003; this case was converted to a case under chapter 7 on March 18, 2004. Ultimately, both cases were substantively consolidated on May 12, 2004, and the Trustee was confirmed as the chapter 7 trustee for the consolidated case.

The Trustee soon filed a fraudulent transfer action against, among others, Grantham and Saba seeking to avoid the July 1, 2003 transfer of the Nevada Property to the Grantham and Saba-controlled entities. (Adv.Pro. 04-1168). In July 2004, that lawsuit was settled by the reconveyance of the Nevada Property to Flamingo 55.⁷ Case No. 04-1168, docket No. 16, Settlement Stipulation p. 3-4 (May 6, 2005).

In the midst of this litigation, Grantham and Saba filed a proof of claim in the Flamingo 55 estate based on their attempt to record the Default Judgment in Nevada. This proof of claim asserted reverse veil-piercing. In essence, Grantham and Saba alleged that Senior Care's subsidiary, Flamingo 55, was liable for the debts of its parent. Saba Proof of Claim, filed May 7, 2005. This court has disallowed that claim.⁸ Case No. 03-19478, Docket No. 233 (Nov. 16, 2004).

Meanwhile, Grantham and Saba were still pursuing litigation in California regarding the scams perpetrated against them. In a separate action, captioned "Grantham and Saba v. Investco (and others)," Case No. 03CC00248 (Orange County), the parties reached a settlement under which another entity controlled by Grantham and Saba, Acorn Development, Inc. ("Acorn"), received all of Investco's stock in Flamingo 55, and all of Investco's interests in VTP (the "Investco Settlement").⁹ The transfer thereby effected was stated to be in lieu of Grantham and Saba enforcing the rights they obtained under the Default Judgment. Investco Settlement at p. 8.

Soon after the Investco Settlement was effectuated, Grantham and Saba attempted to amend the statements and schedules in Flamingo 55's case to reflect their new ownership of the equity interests in Flamingo 55. Case No. 03-19478, Docket No. 302 (Dec. 20, 2004), Case No. 03-19478, Docket No. 395 (March 4, 2005). Initially, Grantham and Saba attempted to amend Flamingo 55's Schedule D to list their "lien" as described in their proof of claim based on the domestication in Nevada of the Default Judgment. The court struck this amendment on May 13, 2005 as filed in bad faith; that order was not appealed. Case No. 03-19478, Docket No. 494 (May 13, 2005).

Next, Grantham and Saba attempted to amend Flamingo 55's Schedule A to change the debtor's ownership of the property. Case No. 03-19478, Docket No. 394 (March 4, 2005). The court struck this effort on May 13, 2005 as well.

Finally, Grantham and Saba filed a list of equity security holders for Flamingo 55 listing Acorn as the sole equity holder. Case No. 03-19478, Docket No. 429 (Apr. 11, 2005). This was also struck as no statement of equity holders is required or permitted in chapter 7. Case No. 03-19478, Docket No. 677 (Nov. 8, 2005)

Grantham and Saba's efforts did not stop there. They also attempted to convert Flamingo 55's case to one under chapter 11, or to have it dismissed. Their first motion to this effect was filed on February 1, 2005, Case No....