In re Kids Creek Partners, LP
| Citation | 212 BR 898 |
| Decision Date | 23 September 1997 |
| Docket Number | Bankruptcy No. 94 B 23947,Adversary No. 95 A 00158. |
| Parties | In re KIDS CREEK PARTNERS, L.P., Debtor. David R. HERZOG, Trustee in Bankruptcy, Plaintiff, v. LEIGHTON HOLDINGS, LTD., Cecil R. McNab, and Rafael Rios-Rodriguez, Defendants. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
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Steve Shamash, David A. Belofsky & Associates, and David R. Herzog, Layfer Cohen & Handelsman, Chicago, IL, for Plaintiff.
Neal L. Wolfe and Janet S. Baer, Schwartz, Cooper, Greenberger & Krauss, Chicago, IL, for Leighton & McNab.
Alan P. Solow, Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., Chicago, IL, for Rios-Rodriguez.
This Adversary proceeding relates to the Chapter 7 Bankruptcy proceeding by Kids Creek Partners, L.P. ("Debtor" or "KCPLP") under Title 11 U.S.C. In it, the Chapter 7 Trustee, David Herzog ("Trustee" or "Plaintiff"), has sued Leighton Holdings, Ltd. ("Leighton"), Cecil R. McNab ("McNab"), Rafael Rios-Rodriguez ("Rios"), and Robin A. Schabes ("Schabes") (collectively "Defendants") seeking equitable subordination of Leighton's secured claim (Count I), recharacterization of Leighton's claim as equity (Count II), breach of contract (Count III), breach by McNab of fiduciary duty (Count IV), breach by Rios of fiduciary duty (Count V), and inducement by McNab of others to breach their fiduciary duty (Count VII). Count VI against Schabes was dismissed by agreement with prejudice on March 8, 1996. After the motion of the remaining Defendants for summary judgment was denied, the case was tried before the Court.
The evidence told a story about how the state of Michigan for nominal consideration turned over valuable state property near Traverse City to parties who were to develop the site. Some financing was obtained and efforts made to sell and develop the property. The price offered was lower than hoped for, too low to meet both financial requirements of the project and also enable payment of a threatened capital gains tax. To avoid that tax, the Debtor's part in the project was aborted, its dissolution announced, and the Debtor placed in bankruptcy. The Chapter 7 Trustee completed the sale and paid off the lender's mortgage from sale proceeds. Plaintiff complains that the project was doomed by the refusal of Leighton as lender to fund the last advance involved in a series of loans. But the evidence showed that the project failed due to mismanagement, breach of contractual obligations owed by Debtor to the lender, a lower offered sale price than was hoped for, and the capital gains tax problem, among other reasons not caused by Defendants. If the final loan advance had been extended, the project still would have failed, and there were ample contractual grounds to deny the final funding. In the end, a most valuable site obtained for nominal consideration and having great potential for different uses and community enhancement was financed to a significant stage, planned, disputed over, bargained for, and maneuvered over by people who laid the groundwork for development, but at last, when Debtor's part in the Project ended, the whole effort had built . . . nothing at all.
At the close of Plaintiff's case in chief, Defendants other than Rios1 moved for partial findings pursuant to Fed.R.Civ.P. 52(c) (applicable pursuant to Fed.R.Bankr.P. 7052). Following argument, the Court then announced from the bench that the motion would be allowed after Findings of Fact and Conclusions of Law were prepared, and the trial was therefore suspended. The motion of those Defendants is now granted and judgment will be separately entered in their favor pursuant to the following Findings of Fact and Conclusions of Law made and entered under Fed.R.Civ.P. 52(a)
Subject matter jurisdiction lies under 28 U.S.C. § 1334. This case is before the Bankruptcy Court pursuant to 28 U.S.C. § 157 and Local General Rule 2.33(A) of the United States District Court for the Northern District of Illinois. Venue lies properly under 28 U.S.C. § 1409. Core jurisdiction exists for Counts I and II under 28 U.S.C. § 157(b)(2). Jurisdiction over Counts III, IV, and VII is related and non-core, but the parties to those counts have consented to entry of final judgment by the bankruptcy court as to these counts. Jurisdiction over Count V is also non-core. However, Defendant Rios did not consent to entry of final judgment for this Count.
1. The Debtor in this Chapter 7 bankruptcy case is Kids Creek Partners Limited Partnership, a Michigan limited partnership. The bankruptcy case arises from an involuntary petition filed on December 5, 1994, pursuant to which an Order for Relief was entered on December 30, 1994. Plaintiff David R. Herzog is the Chapter 7 bankruptcy trustee for the Debtor.
2. Debtor was formed by Carl Groesbeck ("Groesbeck"), an Illinois resident, for the purpose of acquiring and developing a parcel of real estate in Traverse City, Michigan ("Commons Development Project"), commonly referred to as the Grand Traverse Commons ("Commons").
3. The general partner of the Debtor was Kids Creek Development Company ("KCDC"), a Michigan corporation. KCDC is currently a debtor in a related Chapter 7 bankruptcy case. KCDC's bankruptcy case also arises from an involuntary petition filed on December 5, 1994, pursuant to which an Order for Relief was entered on December 30, 1994. KCDC was a corporation whose common stock was entirely owned by Mainstream Development Corporation ("Mainstream").
4. Mainstream was an Illinois corporation which maintained its principal offices in the Chicago, Illinois area. Mainstream is currently a debtor in a related, Chapter 7 bankruptcy case. Mainstream's bankruptcy case also arises from an involuntary petition filed on December 5, 1994, pursuant to which an order for Relief was entered on December 30, 1994.
5. Groesbeck was the president, director, and holder of the largest number of shares of common stock of Mainstream, the president of KCDC, and one of the limited partners of KCPLP. Groesbeck created all three entities during the last half of 1992. Mainstream and KCDC were incorporated in September 1992 and the Debtor was formed some time after. All three entities were capitalized with the minimum capitalization required by law. Debtor was capitalized in the aggregate amount of $1,000 through two checks, one signed by Andrew McGhee ("McGhee") in the amount of $990, the other signed by Groesbeck in the amount of $10.
6. Groesbeck, McGhee, and Defendants Rios and Schabes were officers and directors of both KCDC and Mainstream. Rios, Schabes, and McGhee were also limited partners in the Debtor. Rios and Schabes are both Chicago, Illinois residents.
7. Defendant Leighton Holdings Ltd. is a Cayman Islands corporation. Defendant McNab is a California resident and a licensed attorney. McNab was and is the investment manager for Leighton. McNab has also identified himself as an attorney for Leighton. McNab was also a 50% shareholder in and CEO of a corporation known as "Del Rey Financial" ("Del Rey"). Del Rey allegedly facilitated equity and debt participation in real estate projects. McNab testified, but was not a credible witness at trial. He was extremely evasive and answered many questions with "I don't recall." McNab failed to recall some documents which he himself had written. However, despite McNab's lack of candor, part of his testimony was corroborated by other witnesses, documentary evidence, pretrial stipulations of the parties, or by matters found undisputed following denial of Defendants' pretrial motion for summary judgment.
8. Lakeside Partners ("Lakeside") is a California general partnership of which McNab is a general partner, although there exists no written partnership agreement with respect to Lakeside. Lakeside was formed in conjunction with a loan agreement described below as "LASA One." It was formed for the purpose of receiving equity interests in KCPLP and Mainstream.
9. Rios is a Harvard Law School schoolmate and longtime friend of McNab. McNab did not know Groesbeck until Rios introduced them. Rios and McNab refer to each other as "closest" friends. From the time they met in 1981 or 1982, they have spoken regularly, "sometimes every day for weeks at a time." Rios and McNab remained in regular contact with each other throughout the time they were active in the Commons Development Project. Rios acted as the attorney for the Debtor as to matters in Chicago dealing with Leighton prior to 1994, but had been unemployed from spring 1992 until January 21, 1993.
10. Schabes is a friend and business colleague of Rios. Rios met Schabes in late 1986 or 1987 when Rios hired Schabes to work for him at the City of Chicago as a planning coordinator. Rios had been Schabes' supervisor, but Schabes had more planning experience than Rios. On or about September 16, 1992, Rios contacted Schabes and told her about his potential involvement in the Commons Development Project. In his initial discussions with Groesbeck, Rios told Groesbeck that he intended to work with Schabes on the Project. In fact, Rios insisted that Schabes had to participate. Schabes did not know Groesbeck until Rios introduced them.
11. Richard R. Murray ("Murray") is an Illinois resident, an attorney licensed to practice in Illinois, and the president and sole shareholder of Ross Development Company ("Ross"), an Illinois corporation.
12. This case involves efforts by a number of persons and entities to develop or redevelop approximately 450 acres of land (the "Project Site" or "Commons") originally owned by the State of Michigan together with the buildings and other improvements thereon, located in Traverse City and Garfield...
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