In re Kraz, LLC

• Decision Date: 27 October 2015
• Docket Number: Case No. 8:15–bk–07039–MGW
• Citation: 539 B.R. 887
• Parties: In re: Kraz, LLC, Debtor.
• Court: U.S. Bankruptcy Court — Middle District of Florida

539 B.R. 887

In re: Kraz, LLC, Debtor.

Case No. 8:15–bk–07039–MGW

United States Bankruptcy Court, M.D. Florida, Tampa Division.

Signed October 27, 2015

Stephen R. Leslie, Mark F. Robens, Stichter, Riedel, Blain & Postler, P.A., Edward William Collins, The Law Office of William Collins, P.A., Counsel for the Debtor

John A. Anthony, Stephenie B. Anthony, Allison C. Doucette, Anthony & Partners, LLC, Counsel for BB&T

MEMORANDUM OPINION ON AMOUNT OF CLAIM

Michael G. Williamson, Chief United States Bankruptcy Judge

More than three years ago, a state court denied Branch Banking & Trust's attempt to foreclose its mortgage on the Debtor's property because the state court determined BB & T had improvidently declared a default. Now, as part of its claim in this bankruptcy case, BB & T seeks to recover interest that accrued on its loan while its foreclosure action was pending, as well as attorney's fees and costs incurred after the adverse judgment but before the petition date. BB & T also claims interest that has accrued (at the contractual default rate) since it declared a second default six months ago when the Debtor failed to pay the note in full on the maturity date. The parties have filed cross-motions for summary judgment seeking a determination of the amount of BB & T's claim as a matter of law.

The Court concludes BB & T is not entitled to accrued interest or attorney's fees and costs as a matter of law. The state court judgment plainly provides that the loan would be reinstated nunc pro tunc to the day before the default was declared and that no “accrued principal and interest payments” would be due. And because BB & T orchestrated a default for its own benefit, it would be improper to award BB & T fees incurred in enforcing its promissory note in state court (even post-judgment). There is a question of fact, however, as to whether BB & T is entitled to post-maturity default interest because it is unclear whether BB & T prevented the Debtor from timely tendering the required balloon payment. Accordingly, the Court will grant the Debtor's motion for summary judgment as to accrued interest and attorney's fees and costs as a matter of law but deny the summary judgment motion as to the post-maturity interest without prejudice.

Undisputed Facts

Despite years of contentious litigation between the parties, the facts of this dispute are, for the most part, uncontested and relatively straightforward. The Debtor operates a storage facility and flex commercial space known as Causeway Self Storage. It developed the storage facility using nearly $5.2 million in funding from Colonial Bank in 2006.¹ In exchange, the Debtor gave Colonial Bank a $5.2 million note, with a five-year balloon payment, secured by a mortgage on the storage facility.² Three years later, Colonial Bank went into receivership, and the FDIC sold substantially all of its assets—including the Debtor's loan—to BB & T.³ In January 2010, just months after it acquired Colonial Bank's assets, BB & T sued to foreclose its mortgage on the Debtor's storage facility, claiming the Debtor's loan was in default.

But Judge William Levens, the state court judge who presided over the foreclosure action, ruled against BB & T at the conclusion of a March 1–2, 2012 bench trial.⁴ After considering the evidence at trial, Judge Levens found that the Debtor, in fact, had a long and unblemished record of good-faith payments and that a bona fide default never occurred.⁵ According to Judge Levens, BB & T improvidently initiated a default to maximize collection from the FDIC under a loss-share agreement.⁶ Because he concluded BB & T breached its duty of good faith and fair dealing to the Debtor, Judge Levens determined BB & T's foreclosure claim should be denied in its entirety.⁷

So on May 18, 2012, Judge Levens entered a final judgment ordering the Debtor's loan reinstated as of June 30, 2009, as well as extending the maturity date fourteen months (presumably to account for the time the parties were in litigation), as follows:

It is therefore ORDERED and ADJUDGED that the loan and all loan documents be reinstated nunc pro tunc to June 30, 2009 (i.e., pre-“default”). The terms of the loan and the loan documents shall remain in effect as they would have as of that date. The maturity of the loan is extended fourteen months from the effective date of this order. As there was no “default,” there are no accrued principal and interest payments due from Defendants. Rather, Defendants will pick up payments where such payments left off in June 2009 (after such principal is credited with all such amounts as detailed below).⁸

The final judgment required BB & T to credit the Debtor for payments the state court receiver made to BB & T and any payments the state court receiver received from the Debtor.⁹ Under the final judgment, no loan payments were due until the parties agreed on the new principal (after certain credits were applied) and a new payment schedule.¹⁰

BB & T appealed the state court judgment. While the appeal was pending, BB & T determined that the principal balance due on the loan as of June 30, 2009—taking into account the credits required by Judge Levens—was $4,799,763.98 and that the new monthly payment on the loan was $30,760.49.¹¹ The Second District Court of Appeal affirmed Judge Levens on eleven of the twelve issues BB & T raised on appeal.¹² After he was affirmed by the Second DCA, Judge Levens entered an order providing that the effective date of the final judgment was February 28, 2014, which meant the Debtor was required to begin making the $30,760.49 monthly payment beginning on that date and that the new maturity date for the loan was April 28, 2015.¹³

BB & T does not dispute that the Debtor made each of the $30,760.49 monthly payments between February 28, 2014 and April 28, 2015. Nor is there any dispute that the Debtor did not pay the note in full by April 28, 2015, although the reason for nonpayment does appear to be in dispute. In any case, on April 30, 2015, two days after the extended maturity date, BB & T filed an action in federal court seeking to foreclose its mortgage on the Debtor's property.¹⁴

The Debtor filed this chapter 11 case to stop BB & T's foreclosure action.¹⁵ Soon after the case was filed, BB & T moved to dismiss the case as a bad-faith filing under Phoenix Piccadilly .¹⁶ BB & T also moved to confirm the automatic stay was not in effect because (1) the Debtor had not made adequate protection payments; (2) the case is a bad-faith filing; (3) BB & T was free to pursue claims against guarantors (the Debtor's principals); and (4) this is a single-asset case, and the Debtor is manifestly and permanently incapable of confirming a plan.¹⁷ The Court set the two contested matters for a final evidentiary hearing.

It quickly became apparent to the Court that this case had none of the hallmarks of a typical Phoenix Piccadilly bad-faith filing.¹⁸ To be sure, this is a two-party dispute. But the typical Phoenix Piccadilly bad-faith filing involves a debtor who loses a foreclosure case and then files for bankruptcy on the eve of foreclosure to thwart its lender from exercising its in rem remedies. And there are generally other efforts to delay the bankruptcy case. Here, by contrast, the Debtor initially prevailed in the state court foreclosure action, filed this case soon after the district court foreclosure action was filed, and has expeditiously proceeded to confirmation. The only real basis for dismissal or granting stay relief is if there is no hope for confirmation within a reasonable period of time.

The Debtor's ability to confirm a plan within a reasonable time principally turns on two issues raised by BB & T's motions: (1) the amount of BB & T's claim; and (2) the value of the Debtor's property. The Court took evidence on both of those issues during three days of trial.¹⁹ Both sides were fully heard on BB & T's motions at trial and supplemented their arguments as to the amount of BB & T's claim with cross-motions for summary judgment.²⁰ So the Court has before it the parties' cross-motions for summary judgment on the amount of BB & T's claim, and the Court is permitted under Rule 52(c) to enter final judgment on an issue when a party has been fully heard.²¹

Conclusions of Law

Although the parties both agree that the principal amount of BB & T's claim as of June 30, 2009 was $4,754,860.26,²² they nonetheless remain more than $2.5 million apart on the total amount of BB & T's claim. On the one hand, the Debtor says BB & T's claim is now $4,590,573—$164,287.26 less than it was on June 30, 2009.²³ On the other hand, BB & T says its claim is now $7,194,719.63. BB & T has added three components of damages to the agreed principal that accounts for the dispute over the claim amount.

First, BB & T says it is entitled to $1,060,640.25 in accrued interest from June 30, 2009 through April 28, 2015. Second, BB & T says it is entitled to $671,780.48 in attorney's fees and costs. Third, BB & T says it is entitled to $410,350.50 in default interest since April 28, 2015. The Court concludes that BB & T is not entitled to accrued interest or attorney's fees as a matter of law.

BB & T is not entitled to accrued interest .

The dispute over whether BB & T is entitled to accrued interest centers on one sentence in Judge Levens' final judgment: “As there was no ‘default,’ there are no accrued principal and interest payments due from Defendants.”²⁴ According to the Debtor, that language plainly precludes BB & T's claim to interest that accrued from June 30, 2009 through the effective date of the judgment.²⁵ BB & T, for its part, makes a grammatical argument that the plain language does not preclude a claim for accrued interest.²⁶ To the contrary, the Court concludes the plain language of Judge Levens' final judgment mandates that BB & T is not entitled to accrued interest from June 30, 2009 through the effective date of the final judgment.

The final judgment specifically provides that the...