In re Johnston Hawks, Ltd., Bankruptcy No. 85-00067.
| Decision Date | 23 May 1985 |
| Docket Number | Bankruptcy No. 85-00067. |
| Citation | 49 BR 823 |
| Parties | In re JOHNSTON HAWKS, LTD., Debtor. |
| Court | U.S. Bankruptcy Court — District of Hawaii |
Michael A. Yoshida, Honolulu, Hawaii, for debtor.
Don J. Gelber, Honolulu, Hawaii, for petitioning creditors.
On February 5, 1985, Chicago Credit Services ("Chicago Credit"), Champion Mortgage Company ("Champion") and MPI Consultants ("MPI") (collectively called "petitioning creditors") filed an Involuntary Petition Under Chapter 7 against Jack J. McGarrity, an individual ("McGarrity"), and Johnston Hawks Limited, a Hawaii corporation ("Johnston Hawks").
On March 12, 1985, McGarrity and Johnston Hawks filed a Motion For An Order Dismissing Proceedings and Assessing Attorneys' Fees and Costs, Damages and Punitive Damages or, in the Alternative, Requiring Petitioning Creditors to File a Bond ("Motion to Dismiss"). At the hearing, Michael A. Yoshida, Esq., represented Jack J. McGarrity and Johnston Hawks, and Robert J. Faris, Esq., and Don Jeffrey Gelber, Esq., represented the petitioning creditors. At the conclusion of the hearing, this Court dismissed McGarrity from these proceedings and further ruled that a subsequent hearing will be scheduled to determine whether attorneys' fees, costs and damages should be assessed against the petitioning creditors with respect to McGarrity. Johnston Hawks is the remaining debtor in the involuntary petition. On May 10, 1985 the Court issued a partial oral ruling on the Motion to Dismiss. This Memorandum Decision further clarifies and modifies the Court's oral ruling and also addresses the remaining issues in this case.
On February 5, 1985, Chicago Credit, Champion Mortgage and MPI filed a joint Involuntary Petition under Chapter 7 against McGarrity and Johnston Hawks. The Involuntary Petition was filed on behalf of the petitioning creditors by Burton R. Berman ("Berman"), an attorney who practices in San Diego, California. Shortly after the involuntary petition was filed, the Court's staff notified Berman that a joint involuntary petition was not proper. Berman then retained the Hawaii law firm of Gelber & Gelber to correct the defects in the petition. On March 8, 1985, an Ex Parte Motion to Strike Debtor Jack J. McGarrity From Involuntary Petition was filed by the law firm of Gelber & Gelber on behalf of the petitioning creditors. The involuntary petition was not served on McGarrity and Johnston Hawks.
On March 12, 1985, McGarrity and Johnston Hawks filed the instant Motion to Dismiss and, on the following day, McGarrity and Johnston Hawks filed a Notice of Hearing on the Motion to Dismiss. This Notice provided that the petitioning creditors had filed an Involuntary Petition against McGarrity and Johnston Hawks and that McGarrity and Johnston Hawks have filed a motion seeking to dismiss the Involuntary Petition. In addition, this Notice provided that any creditor or interested party may file written objections to the dismissal or may appear to contest the dismissal. The Notice also provided that creditors have the opportunity to intervene in the involuntary petition if they believe that this case should not be dismissed. McGarrity and Johnston Hawks sent this notice to 40 creditors on March 12, 1985.
At the hearing on the Motion to Dismiss, the Court dismissed McGarrity from the proceeding. Johnston Hawks (hereinafter referred to as "Debtor") is the remaining debtor in the involuntary petition.
The Debtor is a Hawaii corporation which is wholly owned by McGarrity and his wife. The Debtor's principal business is the development of a time-share resort, known as "Shadow Hawk", located in Welches, Oregon.
The involuntary petition was filed by three creditors of the Debtor who contend that they are holders of claims against the Debtor with respect to the financing of the Shadow Hawk project. Champion asserts that it is a holder of a claim in the amount of $150,000.00 for its services as the bond broker. MPI contends that it is the holder of a claim for its services as the interim loan broker. Chicago credit asserts that it is the holder of a claim in the amount of $10,000.00 based upon a promissory note which the Debtor had given to Champion in connection with the financing of the project and which was subsequently transferred to Chicago Credit.
On September 6, 1983, the Debtor transmitted to Champion an Application for a Stand-by Loan Commitment in the amount of $6,000,000.00 for a term of two years. The Application provided for a commitment fee in the amount of 5% ($300,000.00) for the first year plus 3% for each additional year the commitment is kept in force. The Application was accompanied by a deposit in the amount of $30,000.00 and provided that, in the event the Debtor elects not to accept the stand-by loan commitment, the deposit shall remain with Champion as full compensation for its efforts in issuing the loan.
Champion asserts that after the Application was sent, the Debtor and Champion agreed that a financial guaranty bond would be issued to secure its obligations under the stand-by loan commitment and that this agreement was confirmed in a letter dated December 1, 1983 from Vincent Coniglio, the President of Champion, to Robert Garner, who acted as the Debtor's agent in connection with the transaction. Champion asserts that the Debtor agreed that the bond premium of 2% would be paid by Champion out of its 5% fee ($300,000.00), leaving a net fee owed to Champion in the amount of $180,000.00. Champion claims that after deducting the $30,000.00 deposit which was paid with the Application, the Debtor owes Champion a balance of $150,000.00.
In a letter dated December 14, 1983, Champion agreed to provide the Debtor with a conventional stand-by loan commitment and financial guarantee bond subject to certain terms and conditions. Champion requested an additional $10,000.00 for the stand-by loan commitment and financial guarantee bond. Champion apparently threatened to withdraw the stand-by commitment and guarantee bond if the Debtor failed to pay the additional $10,000.00. In a letter to Champion, dated March 19, 1984, McGarrity indicated that the Debtor would have difficulty paying the additional $10,000.00 and asked Champion not to withdraw the stand-by commitment and guarantee bond.
On February 27, 1984, the Debtor executed a promissory note in favor of Champion in the amount of $10,000.00. The promissory note is subject to the following condition:
This Note is payable upon receipt of an interim loan commitment for Shadow Hawk, and is secured by the stand-by loan commitment from Champion Mortgage, with terms and conditions satisfactory to Johnston Hawks, Ltd. and Jack J. McGarrity.
On November 1, 1984, approximately four months prior to the filing of the involuntary petition, Champion Mortgage claims to have transferred its right, title and interest in the promissory Note to Chicago Credit. Champion claims that this transfer was made in partial satisfaction of a debt owed by Champion to Chicago Credit and that it received a credit of $7,500.00 against its debt to Chicago Credit. Neither Champion nor Chicago Credit has presented any information or evidence with respect to the nature of Champion's debt to Chicago Credit. Moreover, they have not submitted any document evidencing the transfer of the promissory note from Champion to Chicago Credit.
Subsequently, the stand-by loan commitment was not required for the financing of the Debtor's project. Champion contends that although the stand-by loan commitment was not required, the financial guaranty bonds procured by Champion were necessary to obtain the financing which was ultimately secured for the Debtor.
In addition, Champion claims that the Debtor has repeatedly admitted and acknowledged the existence of its obligation to Champion. For example, Champion refers to a letter dated November 8, 1984, in which McGarrity instructed First American Title and Insurance Company of Oregon, the escrow holder, to disburse $150,000.00 to Champion. In this letter, McGarrity stated that he had revised the escrow disbursement list for the closing. Item 13 of this list provides that $150,000.00 is to be paid to Champion as the Bond Broker. This letter was written approximately four months prior to the filing of the involuntary petition.
Champion also refers to a letter dated December 20, 1984, from McGarrity to Glacier General Assurance Company, in which McGarrity stated that Glacier had in its possession the sum of $150,000.00 payable to Champion for broker's fees. Finally, Champion claims that $150,000.00 was placed in a bank account in the First Interstate Bank labelled "Johnston Hawks, Limited/Broker's Fees" together with funds owed to MPI Consultants.
On the other hand, the Debtor contends that Champion's claim is subject to a bona fide dispute and is contingent. The Debtor asserts that the Application makes no mention whatsoever that Champion was to act as a "bond broker". In addition, the Debtor argues that the financial guarantee bond was a condition imposed by Champion which was not accepted by the Debtor. The Debtor claims that, although Champion issued a stand-by loan commitment on December 14, 1983, the Debtor elected not to accept the stand-by loan commitment. The Debtor asserts that the Application provides that if the Debtor does not elect to accept the stand-by loan commitment offered by Champion, then the $30,000.00 deposit will remain with Champion as full compensation for its efforts in issuing the stand-by loan commitment. The Debtor claims that it made this payment by way of a check from Canadian Imperial Bank of Commerce. Therefore, the Debtor argues that it has satisfied its obligations under the Application.
Furthermore, Debtor claims that, when it acknowledged owing $150,000.00 to Champion in several letters, it mistakenly believed that it was further indebted to...
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