In re Martin
| Citation | 419 B.R. 772 |
| Decision Date | 13 November 2009 |
| Docket Number | Adversary No. 07-1054.,Bankruptcy No. 05-17687. |
| Parties | In re James Lloyd MARTIN, Debtor. Jerrold D. Farinash, Trustee, Plaintiff, v. Tuscany 2 Residential, LLC, Defendant. |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Eastern District of Tennessee |
Jason D. Demastus, Richard T. Klingler, Kennedy, Koontz & Farinash, Chattanooga, TN, for Plaintiff.
Jerrold D. Farinash, Chattanooga, TN, pro se.
F. Scott LeRoy, Evans LeRoy & Hackett, PLLC, Chattanooga, TN, for Defendant.
R. THOMAS STINNETT, Bankruptcy Judge.
The debtor in bankruptcy, James Martin, was a commercial real estate developer involved with the Tuscany project in Evans, Weld County, Colorado. The debtor entered into two contracts to purchase land in the project area from Harry Wiedeman and a third contract to purchase land from Larry and Martha Rhoadarmer. The debtor assigned all three contracts to the defendant, Tuscany 2 Residential, a limited liability company or LLC. The trustee in bankruptcy brought this suit to avoid the debtor's assignment of the second Wiedeman contract and the Rhoadarmer contract. The trustee contends the debtor made the assignments to secure a debt to Tuscany 2 Residential. The trustee has filed a motion for summary judgment. Tuscany 2 Residential has responded and filed a cross motion for summary judgment.
The facts in this adversary proceeding involve several limited liability companies (LLC's) whose names include "Tuscany" as the first word. The facts will be easier to read and maybe easier to understand if the court leaves "Tuscany" and LLC out of these names. The court may shorten the name even more. For example, the court refers to Tuscany 2 Residential, LLC, as 2 Residential or 2Res and to Tuscany 3 Residential as 3 Residential or 3Res. The court will refer to TLD Lender as Lender.
A motion for summary judgment requires the court to view the evidence in the light most favorable to the party against whom judgment is being sought. The court can grant summary judgment only if it determines that there is no genuine issue as to any material fact, and based on the undisputed facts, the law entitles the moving party to judgment in its favor. Fed. R. Bankr.P. 7056; Fed.R.Civ.P. 56(c); Highland Capital, Inc. v. Franklin Nat. Bank, 350 F.3d 558, 564 (6th Cir.2003). The moving party has the burden of proving there is no genuine issue of material fact to be decided by a trial.
The debtor entered into a contract with Mr. Wiedeman to buy real property located in Weld County, Colorado (the first Wiedeman contract). The contract called for a series of purchases of at least 30 acres each until all the land was purchased.
In July the debtor entered into the second Wiedeman contract to buy more land in the project area, and in August he entered into the Rhoadarmer contract for more land in the area.
The first Wiedeman contract was recorded in the property records of Weld County, Colorado.
In return for a loan, Parcel 2 executed a promissory note to Lender in the amount of $2,450,000. Lender was an LLC created by Litchfield Capital and Interim Capital, and perhaps the debtor. Its purpose was to lend money to a Tuscany entity for phase 2 of the Tuscany land development. Interim Capital was probably the loan servicer.
The note was secured by a deed of trust on real property in phase 2 of the Tuscany development. It was also secured by all the capital and profits of Parcel 2. Finally, the debtor and Parcel 2 assigned the first Wiedeman contract to Lender as additional collateral for the debt. The assignment identified the debtor as the manager of Parcel 2. A later release and assignment agreement identified the debtor as the sole member of Parcel 2.
The assignment provided that the debtor remained liable to the seller, Mr. Wiedeman, but the assignment gave Lender the power to fulfill the debtor's obligations and to take any other actions to preserve the contract. The assignment also gave Lender the authority to enforce the first Wiedeman contract in the place of the debtor. The assignment provided that it would be governed by the laws of Arizona except Arizona's conflicts of laws rules. The assignment was recorded in April 2003.
The debtor assigned his interest in the second Wiedeman contract and the Rhoadarmer contract to Land Holding LLC. The debtor was the organizer and sole member of Land Holding. The facts do not reveal whether these assignments were recorded in the real property records.
Lender and Parcel 2 entered into new contracts dealing with Parcel 2's secured debt to Lender under the promissory note for 2.45 million dollars. The key contracts were the release and assignment contract and the operating agreement for 2 Residential.
The release and assignment recited some background facts. It stated that: Lender had begun the foreclosure process in March 2004; Parcel 2's payments on the note were more than the principal and interest required to pay off the note; Parcel 2 owed other charges, such as attorney's fees, public trustee's fees, publication fees, advertising charges, and title insurance premiums; Parcel 2's debt for those charges—the remaining mortgage debt— was $290,065.03.
Parcel 2's debt to Lender was still secured by the mortgage on real property in phase 2 of the Tuscany development and by the debtor's assignment of the first Wiedeman contract. The release and assignment provided for Lender's release of the mortgage on the real estate and release of Parcel 2 from liability under the note, including the remaining mortgage debt. The release and assignment also provided that Lender would release the first Wiedeman contract.
Parcel 2 and Lender agreed to create 2 Residential to be the owner of the first Wiedeman contract. The deal included making the debtor, not Parcel 2, and Lender the joint owners or members of 2 Residential (2Res). Debtor became the Class A member. As part of this process, the parties did not make Lender a member of 2Res. Instead, 3 Residential (3Res) took the place of Lender and became the Class B member.
The bankruptcy trustee contends the debtor's assignment of the second Wiedeman contract and the Rhoadarmer contract to 2Res amounted to a transfer to secure a debt to 2Res or the Class B member. The true effect of the transaction depends first on the rights and obligations of the debtor and 3Res under the operating agreement for 2Res.
Again, the operating agreement for 2Res made the debtor the Class A member and 3Res the class B member. The initial capital contribution by 3Res was $290,065.63—the remaining mortgage debt that Parcel 2 owed to Lender. The contracts released Parcel 2 from the debt and treated it as 3Res's capital contribution to 2Res. The operating agreement required 3Res to make an additional capital contribution of $200,000 to be used by the debtor to plat the real property known as Tuscany Parcel 2.
The operating agreement provided that the debtor "shall" make several additional capital contributions. First, it required contribution of the money needed to complete the purchases under the first Wiedeman contract. If the debtor failed to make this contribution or provide timely proof of his ability to make it, then 3Res could "if desired" make the additional capital contribution. In that situation the operating agreement would count the contribution as an additional capital contribution by 3Res.
Second, the operating agreement required the debtor to make an additional capital contribution of the amount needed to buy out 3Res's interest in the LLC. The beginning point for calculating the amount needed to buy out another member in an LLC is the total of the other member's capital contributions.
The amount needed to buy out 3Res was identified as the redemption purchase price. It is explained in Section 3.9 of the operating agreement. Section 3.9 is titled "Additional Capital Contributions from Class B Member; Dividend Accrual for Class B Members Capital Contributions." 3Res was the Class B member.
Section 3.9 provided for cumulative preferred dividends of 15% per annum on initial capital contribution by the Class B member, the $290,065.63 remainder of the mortgage debt. All additional capital contributions by the Class B member were to be counted at $1.10 for each $1.00 contributed. This included the $200,000 contributed by 3Res for the debtor's use in platting part of the phase 2 property. If the Class B member made an additional capital contribution to complete a purchase under the first Wiedeman contract, that contribution would accrue cumulative preferred dividends of 20% per annum. Of course, the Class B member could make this additional capital contribution only if the debtor failed or was not able to make it.
Section 3.9 included a penalty dividend rate if the debtor failed to submit a plat of the Tuscany 2 property by September 1, 2004:
If either the property known as "Tuscany 2 Residential" is not prepared and submitted to the City of Evans, Colorado by September 1, 2004 (meaning the preliminary plat is submitted to the City of Evans), then the dividend rate on all capital contributions (both initial and subsequent) shall be 20%.
Finally, Section 3.9 set the redemption purchase price as all of the above:
(1) the unpaid mortgage debt that was the Class B member's initial capital contribution, plus a dividend of 15% per annum or 20% if Parcel 2 failed to meet the platting deadline;
(2) if the Class B member contributed the money to complete purchases under the first Wiedeman contract, 110% of that amount plus a dividend of 20% per annum;
(3) 110% of any other additional capital contributions, including the $200,000 contribution called for by the operating agreement, plus a dividend of 15% per annum or 20% if Parcel 2 failed to meet the platting deadline.
Section 7.11 of the...
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