In re Llc

• Decision Date: 18 January 2011
• Docket Number: Bankruptcy No. 09–11237 ELF.,Adversary No. 09–067 ELF.
• Citation: 443 B.R. 671
• Parties: In re SABERTOOTH, LLC, Green Goblin, Inc., Debtors.Sabertooth, LLC, Green Goblin, Inc., Plaintiffs,v.Warren Simons, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

443 B.R. 671

In re SABERTOOTH, LLC, Green Goblin, Inc., Debtors.Sabertooth, LLC, Green Goblin, Inc., Plaintiffs,

v.Warren Simons, Defendant.

Bankruptcy No. 09–11237 ELF.

Adversary No. 09–067 ELF.

United States Bankruptcy Court, E.D. Pennsylvania.

Jan. 18, 2011.

Alan L. Frank, Alan L. Frank Law Associates PC, Elkins Park, PA, for Plaintiffs.Benjamin A. Andersen, Michael G. Trachtman, Powell Trachtman Logan Carrie & Lombardo, King of Prussia, PA, for Defendant.

OPINION

ERIC L. FRANK, Bankruptcy Judge.

I. INTRODUCTION

On January 22, 2009, Venom, Inc. (“Venom”) filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code in a case docketed at Bky. No. 09–10445. On February 23, 2009, two Venom affiliates, Sabertooth, LLC (“Sabertooth”) and Green Goblin, Inc. (“Green Goblin”), filed their own chapter 11 petitions, docketed at Bky. Nos. 09–11237 and 09–11239, respectively. Shortly thereafter, an order was entered providing for the joint administration of the three bankruptcy cases.¹

On March 6, 2009, all three debtors commenced this adversary proceeding by filing a Complaint against Defendants Warren Simons and Alan Simons, asserting a claim for breach of contract and requesting both compensatory and punitive damages. Before any responsive pleading was filed, the Plaintiffs filed an Amended Complaint that omitted the request for punitive damages. Thereafter, disposition of Motions to Dismiss the Amended Complaint and the Second Amended Complaint resulted in the dismissal of Venom as a party plaintiff. Subsequently, on December 18, 2009, Sabertooth and Green Goblin stipulated to the dismissal of their claim against Defendant Alan Simons, leaving Warren Simons as the sole defendant.

Meanwhile, on June 30, 2009, Warren Simons (hereafter, “Simons”) filed a proof of claim, in the amount of $1,926,805.94, which identified Venom as the “debtor.” (Bky. No. 09–10445, Claim No. 26–1). On July 20, 2009, Venom filed an objection to Simons' proof of claim. (Bky. No. 09–10445, Doc. # 189). On August 21, 2009, Simons filed an amended claim, in the amount of $1,107,450.14, which identified all three debtors as the debtor. After a number of continuances, by agreement of the parties and order dated October 22, 2009, the hearing on the claims objection was consolidated with the trial of this adversary proceeding. (Bky. No. 09–10445, Doc. # 290).² The bases for the claims objection and the breach of contract claim asserted in the adversary proceeding are substantially the same, if not identical.

On June 11, 2010, the Plaintiffs filed a Motion for Partial Summary Judgment (“the Plaintiffs' Motion”). (Adv. No. 09–67, Doc. # 105). On June 29, 2010, Simons filed a Response to the Plaintiffs' Motion, which included what was styled as a “Cross Motion for Partial Summary Judgment,” asserting that he is entitled to judgment as a matter of law on all of the Plaintiffs' claims. ³ Later, on August 3, 2010, presumably as a “fall back” in the event that his Cross–Motion were denied, Simons filed a second Motion for Partial Summary Judgment on the Issue of Damages. (Adv. No. 09–67, Doc. # 124). The parties completed briefing all pending matters on October 4, 2010.

For the reasons set forth below, I conclude:

(1) this court lacks subject matter jurisdiction over Sabertooth's claim against Simons, requiring dismissal of the Sabertooth's claim without prejudice; and,

(2) all of the motions for partial summary judgment should be denied;

(3) there is no genuine issue of fact as to one of the issues in the proceeding: Green Goblin was not an intended third party beneficiary of an agreement entered into by two of its creditors, Business Loan Center, Inc. and Simons.

II. FACTUAL BACKGROUND

The following facts are not in dispute.

the formation and purpose of the entities

Venom is a business entity created in 1996 by Kevin and Teresa Burke and John DePrince (collectively, “the Principals”) for the purpose of owning and operating a Gold's Gym franchise in Conshohocken, Pennsylvania.⁴ The Principals subsequently formed two other business entities. The first entity (Sabertooth) was formed to purchase and own a prospective property for the operation of the prospective Gold's Gym franchise. The second entity (Green Goblin) was formed to serve as the operating entity for the Principals' second gym enterprise.

the June 27, 2001 transaction

On June 27, 2001, Sabertooth and Green Goblin entered into a transaction for the purchase of the real property located 431 West Valley Forge Road, King of Prussia, PA (the “Property”) and other assets from Joseph and Anne Proietto (“the Proiettos”). Sabertooth purchased the real property from the Proiettos for $2.5 million. Green Goblin purchased the assets located on the real property, which included a building and the personal property therein, for $600,000.00.

The financing for the transaction came from three sources:

(1) Harleysville National Bank and Trust Company loaned Sabertooth $1.5 million, secured by a first priority mortgage on the Property;

(2) Business Loan Center, Inc. (“BLC”) loaned Green Goblin $1.3 million, secured by a second priority mortgage on the Property; ⁵ and

(3) the Proiettos financed $600,000.00, through two notes (collectively, “the Proietto Notes”) as follows:

• a $475,000.00 note given by Green Goblin (and guaranteed by Sabertooth) ⁶ (“the Proietto–Green Goblin Note”);

• a $125,000.00 note given by Sabertooth (“the Proietto–Sabertooth Note”);

• the Proietto–Sabertooth Note and the Sabertooth guarantee of the Proietto–Green Goblin Note being secured by a third priority mortgage on the Property (“the Sabertooth Mortgage”).

Certain other aspects of these transactions are significant for purposes of this adversary proceeding and the pending motions.

As a condition of granting the loan to Green Goblin, BLC required the Proiettos to delay collection on the Proietto Notes and enforcement of the Sabertooth Mortgage until certain conditions were met. As a result, the Proiettos and BLC entered into two Standby Creditor Agreements (the “Standby Agreements”), one for each of the Proietto Notes. Each Standby Agreement provided, in material part:

To induce Business Loan Center, Inc. (Lender) to make an SBA guaranteed loan to Standby Borrower or guaranteed by Standby Borrower ... Standby Creditor agrees:

1. To accept payments of principal and interest after the occurrence of:

a. two years having passed from the date of closing; and

b. Standby Borrower showing on a consolidated basis and acknowledged by Lender, two years of 1.25:1 cash flow/debt service coverage as defined by Generally Accepted Accounting Principles.

* * *

3. To take no action to enforce claims against Standby Borrower on the Standby Loan until Lender's Loan is satisfied.

4. To take no action against Standby Borrower's collateral, without written consent from the Lender, until Lender's Loan is satisfied.

* * *

7. This Agreement applies to any successor to the Standby Creditor or assignee of this Agreement or of Standby Creditor's Loan, including any bankruptcy trustee or receiver or guarantors or sureties of Standby Creditor Loan.

(Exs.G, H).

Neither Sabertooth nor Green Goblin was a signatory to the Standby Agreements.

The repayment provision in each of the Proietto Notes was substantially the same, requiring repayment

in sixty consecutive monthly installments of principal and interest ... per month commencing on the first day of August, 2001 and continuing on the first day of each month thereafter, with a final payment of all then outstanding principal and all unpaid and accrued interest due and payable on the sixty month anniversary of this Note.

The Proietto Notes also qualified the repayment terms by reference to the Standby Agreements, using nearly identical language to that found in Paragraph 1 of the Standby Agreements:

In accordance with a certain Standby Creditors Agreement dated this date and executed by Payees (the “Standby Agreement”), no principal or interest payments for the first two (2) years from the date of this Notes [sic] shall be made and payment of principal and interest will be permitted only after the occurrence of: (a) two (2) years having passed from the date of the Note and (b) Maker shall show on a consolidated basis two (2) years of 1.25:1 cash flow/debt service coverage as defined by generally accepted accounting principles. When principle and interest payments are permitted to be made under the Standby Agreement, Maker shall pay to Payees all accrued and unpaid interest and principal then due in accordance with the Amortization Schedule.

Finally, Paragraph 16 of the Sabertooth Mortgage included a confession of judgment provision, authorizing the entry of judgment by confession against Sabertooth in the event of “any default” of any provision of the Proietto Notes or the Sabertooth Mortgage. assignment to Simons and the confession of judgment

On April 27, 2006, the Proiettos assigned the Proietto Notes and the Sabertooth Mortgage to Simons for $1.00. On July 17, 2006, Simons confessed judgment against Sabertooth in the Court of Common Pleas, Montgomery County, Pennsylvania (“the State Court”), in the amount of $933,575.14.⁷ Sabertooth filed a Petition to Open and/or Strike the Confession of Judgment (“the Petition to Open”) on August 14, 2006. The State Court entered an Order on September 21, 2006, providing that the Petition to Open would be placed upon the argument list upon the completion of discovery and the filing of a Praecipe, but no Argument Praecipe was filed prior to the prior to the commencement of Sabertooth's bankruptcy case in this court.⁸ Currently, Simons' judgment against Sabertooth remains in effect.

III. THE ROOKER–FELDMAN DOCTRINE

Upon review of the summary judgment motions and supporting memoranda, I raised sua sponte the issue whether the adversary proceeding should be dismissed for lack of subject matter jurisdiction under the Rooker–Feldman doctrine and...