In re Franklin Equipment Co.

Decision Date02 October 2009
Docket NumberBankruptcy No. 08-74473-SCS.,Adversary No. 09-07027-SCS.
Citation418 B.R. 176
CourtU.S. Bankruptcy Court — Eastern District of Virginia
PartiesIn re FRANKLIN EQUIPMENT COMPANY, Debtor. Roger Drake, Plaintiff, v. Franklin Equipment Company, Carolyn L. Camardo, Chapter 7 Trustee, Defendants.

Laura C. Pyle, Ross C. Reeves, Willcox & Savage, P.C., Norfolk, VA, for Plaintiff.

Daniel F. Blanks, Douglas M. Foley, McGuireWoods LLP, Norfolk, VA, Harry W. Jernigan, III, Shreen N. Mahmoud, Harry Jernigan CPA Attorney, P.C., Virginia Beach, VA, for Defendants.

MEMORANDUM OPINION

STEPHEN C. ST. JOHN, Bankruptcy Judge.

This matter comes before the Court upon the Motion for Partial Summary Judgment filed on May 13, 2009, by Roger Drake against the Debtor and the Chapter 7 Trustee, Carolyn L. Camardo. At the conclusion of the hearing held on this matter on August 12, 2009, the Court took this matter under advisement. The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 157(b)(2) and 1334(b). Venue is proper pursuant to 28 U.S.C. § 1409(a). This Memorandum Opinion constitutes the Court's conclusions of law.

I. The Complaint and Answer

On December 31, 2008 (the "Petition Date"), Franklin Equipment Company (the "Debtor") filed a petition for relief under Chapter 7 of Title 11 of the United States Code. Roger Drake ("Drake") filed this adversary proceeding on March 10, 2009. Drake's Complaint to Determine Extent, Validity, and Priority of Lien ("Complaint") against the Debtor and Carolyn L. Camardo, Chapter 7 Trustee (the "Trustee") seeks to obtain declaratory judgment as to the extent, validity, and priority of Drake's lien on a certain life insurance policy owned by the Debtor.

The Complaint alleges that on January 27, 2009, the Trustee filed a Motion to Sell Certain Life Insurance Policies (the "Life Insurance Motion"). Through the Life Insurance Motion, the Trustee sought and obtained authority to sell certain life insurance policies to Drake, including Life Insurance policy number 7167287 issued by MetLife Company in the amount of $1.5 million on the life of Drake (the "MetLife Policy").1 Complaint ¶ 8. Drake alleges the MetLife Policy is subject to a collateral assignment in favor of Drake (the "Drake Lien") to secure indebtedness owed to Drake by the Debtor (the "Drake Claim"). Id. ¶ 9. On February 19, 2009, this Court approved the Life Insurance Motion. Under the terms of the Life Insurance Motion, the purchase price of the MetLife Policy was $325,000.00, which amount was to be paid at closing through a reduction of the Drake Claim by $325,000.00. Id. ¶¶ 10, 11. Pursuant to the terms of the Life Insurance Motion and the contract between Drake, as buyer, and the Trustee, as seller, Drake "credit bid" the purchase price subject to a determination of the extent, validity, and priority of the Drake Lien, for which purpose the Complaint was filed by Drake. Id. ¶ 12.

With respect to the Drake Claim, Drake alleges that pursuant to a Line of Credit Note dated April 23, 2008 (the "April 23, 2008 Note"),2 Drake provided an $800,000.00 line of credit to the Debtor. Id. ¶ 13. Drake further alleges the April 23, 2008 Note recites that it is secured by a first priority security interest in the MetLife Policy as follows:

Collateral: This Note is secured by the following collateral and proceeds thereof (the "Collateral"): A first priority security interest in, and collateral assignment of, that certain life insurance policy issued by METLIFE INSURANCE COMPANY OF CONNECTICUT (or other METLIFE COMPANIES, as applicable), bearing contract number 7167287 in the face amount of $1,500,000.

Id. ¶ 14 (quoting Exhibit B to Complaint). Drake also alleges that in conjunction with the April 23, 2008 Note, the Debtor and Drake executed a Security Agreement of even date (the "Security Agreement"),3 which grants Drake a security interest in the MetLife Policy:

Security Interest. Franklin grants Drake a first priority security interest in the following property and any and all additions, accessions and substitutions thereto or therefor and all proceeds therefrom (hereinafter referred to as the "Collateral"): That certain policy of life insurance issued by METLIFE INSURANCE COMPANY OF CONNECTICUT, policy number 7167287 in the face amount of $1,500,000.

Secured Indebtedness. The security interest granted to Drake under this Security Agreement constitutes continuing collateral security to secure the obligations and liabilities of Franklin to Drake pursuant to the Note and the loans evidenced thereby, whether now existing or hereafter incurred (collectively, the "Secured Obligations"), together with any and all costs, expenses liabilities and attorney's fees now or hereafter chargeable to, or incurred by, or disbursed by Drake pursuant to this Security Agreement or to enforce payment of any of the Secured Obligations.

Id. ¶ 15 (quoting Exhibit C to Complaint).

Drake also alleges that, pursuant to the terms of the MetLife Policy, the Debtor executed a Collateral Assignment (the "Collateral Assignment") to assign its interest in the life insurance policy to Drake.4 According to Drake, on or about May 2, 2008, the Collateral Assignment was acknowledged by MetLife.5 Id. ¶ 16.

Drake additionally alleges that the Debtor drew from the line of credit throughout 2008 and, with Drake's consent, overdrew the credit line. The advances were memorialized by a series of twenty-six promissory notes made payable to Drake (the "Twenty-Six Notes"). Drake asserts the principal balance on the April 23, 2008 Note is $800,000.00 and that overdraws total $236,000.00, for a total of $1,036,000.00. Drake requests this Court enter an order declaring the Drake Claim to be at least $800,000.00 and the Drake Lien to be a valid, enforceable, and perfected first lien against the MetLife Policy and $800,000.00 of the proceeds thereof.

In her Answer, the Trustee largely neither admitted nor denied the material assertions of Drake, contending she did not have sufficient facts to do so, and asserted a counterclaim ("Trustee's Counterclaim") that challenges the allegations of Drake on the basis the indebtedness purportedly secured by the MetLife Policy should be recharacterized by this Court as a capital contribution to the Debtor by Drake.6 The Trustee asserts that, in addition to the security interest claimed in the MetLife Policy, Drake, along with Drake Properties, LLC, is listed on Schedule D as having secured claims in certain items of the Debtor's inventory in connection with "loans" made to the Debtor that are reflected in over one hundred promissory notes made between September 20, 2005, and July 10, 2008 ("Floor Plan Notes"). The Trustee further asserts the Debtor allegedly executed a new Line of Credit Note (the "May 2003 Note") in favor of Drake and his sons, Wilson Drake and Randy Drake (collectively, the "Drakes"), and granted a security interest in the Debtor's property as part of the assignment of a loan, which was earlier made to the Debtor by SunTrust Bank, to the Drakes and the renewal of the same. The Trustee alleges the claimed security interests of the Drakes and Drake Properties, LLC, as well as the claimed security interest of Drake in the MetLife Policy should be considered as reflecting equity contributions rather than debt.7

II. The Motion for Partial Summary Judgment

The Motion for Partial Summary Judgment of Drake ("Partial Summary Judgment Motion") seeks the entry of a judgment establishing the "character" of the loan at issue and Drake's perfection of his security interest in the MetLife Policy. Specifically, Drake believes he is entitled to judgment as a matter of law that his lien on the MetLife Policy is valid, enforceable, and entitled to priority, and that the claim secured by the lien on the MetLife Policy is properly characterized as debt.8

Initially supporting the Partial Summary Judgment Motion are three affidavits. The affidavit of Drake ("Drake Affidavit") provides, in pertinent part, as follows:

1. Drake owns 24.36% of the Debtor's stock. Drake Affidavit ¶ 3.

2. Drake extended an $800,000.00 line of credit to the Debtor, memorialized by a Line of Credit Note dated April 23, 2008, which contained a maturity date of May 1, 2009. Id. ¶¶ 5, 6.

3. Drake required a security agreement from the Debtor, which granted Drake a security interest in the MetLife Policy. Id. ¶ 7.

4. The Debtor drew from the line of credit throughout 2008, memorializing the advances in a series of twenty-six notes made payable to Drake.9 Id. ¶ 8.

5. Drake intended, at the time he extended the line of credit to the Debtor and at all times thereafter, any advances made pursuant to the April 23, 2008 Note to be loans, and he expected full repayment of the advances from the Debtor's operating revenues, regardless of the profitability of the Debtor, or from liquidation of the MetLife Policy. Id. ¶ 9.

6. Drake expected the loan to be repaid with interest and has not subordinated his claim pursuant to the April 23, 2008 Note to any other indebtedness of the Debtor. Id. ¶ 10.

7. Drake directed the Debtor to liquidate the MetLife Policy to repay the loan in the autumn of 2008. Id. ¶ 11.

The Partial Summary Judgment Motion is also supported by the affidavit of Wilson Drake. His affidavit ("Wilson Drake Affidavit") provides, in pertinent part, as follows:

1. Wilson Drake is a Vice President of the Debtor and owns 22.19% of its outstanding stock. Randy Drake also owns 22.19% of the stock of the Debtor. The remainder of the stock is owned by Roger Drake (24.36%) and six other individuals. Wilson Drake Affidavit ¶¶ 2, 3 2. Wilson Drake maintained the books and records of the Debtor. Id. ¶ 4.

3. In April 2008, Roger Drake extended an $800,000.00 Line of Credit to the Debtor memorialized by a Line of Credit Note dated April 23, 2008, and contains the terms...

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