In re Midsouth Golf, LLC

• Court: U.S. Bankruptcy Court — Eastern District of North Carolina
• Writing for the Court: Stephani W. Humrickhouse, United States Bankruptcy Judge
• Citation: In re Midsouth Golf, LLC, 549 B.R. 156 (Bankr. E.D. N.C. 2016)
• Decision Date: 29 March 2016
• Docket Number: CASE NO. 13–07906–8–SWH
• Parties: In re Midsouth Golf, LLC, Debtor

549 B.R. 156

In re Midsouth Golf, LLC, Debtor

CASE NO. 13–07906–8–SWH

United States Bankruptcy Court, E.D. North Carolina, New Bern Division .

Signed March 29, 2016

Jason L. Hendren, Rebecca F. Redwine, Hendren Redwine & Malone, PLLC, Raleigh, NC, for Debtor.

ORDER RESOLVING THRESHOLD ISSUES AND DETERMINING THAT SALE OF REAL PROPERTY FREE OF COVENANT MAY BE PART OF CONFIRMED PLAN

Stephani W. Humrickhouse, United States Bankruptcy Judge

A hearing related to confirmation of the debtor's Amended Plan was held in Raleigh, North Carolina on June 23, 2015, at which time the court took under advisement certain issues that it deemed prudent to resolve as threshold matters before proceeding further with confirmation.¹ On September 25, 2015, the court requested that the parties file briefs addressing those issues and, specifically, the question that has proved to be dispositive with respect to whether the debtor can confirm its amended plan: Whether a covenant (the "maintenance covenant") imposing on the debtor an affirmative obligation to maintain and operate the recreational amenities on its property is a real covenant that "runs with the land" and, if so, whether that means (as argued by creditor Fairfield Harbor Property Owners Association, Inc. ("Fairfield")) that under no theory can the maintenance covenant be stripped from the property in connection with a sale of it within the debtor's amended Chapter 11 plan.² Both the debtor and Fairfield filed comprehensive responses, which the court has thoroughly reviewed.

After full consideration and for the reasons set forth below, the court concludes that the state courts' decisions include no findings of fact or law regarding the nature, extent, enforceability, or any other material aspect of the maintenance covenant. For that reason, they are not binding on this court's analysis of the maintenance covenant, although they do inform it. The appellate court's opinions set out extensive factual and legal determinations with respect to Fairfield, MidSouth, and the underlying state court litigation, all of which are integrated into the established "fact set" that MidSouth brings with it into the bankruptcy court. For the reasons set out below, this court concludes that the maintenance covenant does not run with the land; in addition, as a separate and alternative holding, the court finds that even if it did, the property still could and should be sold free and clear of that covenant. Further, resolution of this issue does not require an adversary proceeding.

JURISDICTION

This matter is a core proceeding pursuant to 28 U.S.C. § 157, and the court has jurisdiction pursuant to 28 U.S.C. §§ 151, 157, and 1334to enter final judgment. The court has the authority to hear this matter pursuant to the General Order of Reference entered August 3, 1984, by the United States District Court for the Eastern District of North Carolina.

BACKGROUND AND PROCEDURAL POSTURE

Debtor MidSouth filed its petition under chapter 11 of the Bankruptcy Code on December 20, 2013, after more than a decade of litigation in North Carolina state courts relating to amenities and recreational facilities on real property owned by the debtor within a golf course community in New Bern, North Carolina. Purchased by the debtor in 2000, the 385–acre property ("the Property") features amenities including two golf courses, two marinas, tennis courts, swimming pools, and clubhouses, all of which are part of a large community development that also includes some 3,000 homes, timeshare condominiums, and vacant lots. The community was developed pursuant to written declarations and covenants that were first recorded in 1971, then amended and/or expanded in 1975, 1979, and 1993. Generally speaking, the covenants at the root of the dispute stipulate that the development's residential property owners will pay amenity fees to the owner of the Property (currently, MidSouth)—this is the "amenities covenant"—and, separately, that the owner of the Property will maintain those recreational amenities for use by the residential property owners, along with others; i.e., the "maintenance covenant."

The current dispute originally was sparked by MidSouth's decision to seek changes to the amenity fee payment arrangement applicable to the timeshare owners a few years after it purchased the Property.³ MidSouth's effort to increase fees led to litigation and, ultimately, to the first of three decisions from the North Carolina Court of Appeals pertaining to the amenities covenant and the nature of the contractual obligations as between MidSouth and other parties. The first decision, handed down in 2007, held that the amenity covenant was a personal rather than real covenant, and thus was not enforceable as against the timeshare owners. MidSouth Golf, LLC v. Fairfield Harbourside Condo . Ass'n, Inc., 187 N.C.App. 22, 652 S.E.2d 378 (2007)(the "Timeshare Opinion "). Additional decisions in 2011 affirmed trial court decisions in two separate lawsuits. In the first, the court of appeals agreed that MidSouth breached its covenant to maintain the golf courses when it closed them due to nonpayment of amenity fees, and that Fairfield could enforce the maintenance covenant against MidSouth. Fairfield Harbour Property Owners Ass'n, Inc. v. MidSouth Golf, LLC, 215 N.C.App. 66, 715 S.E.2d 273 (2011)(the "Enforcement Opinion "). In the second, a separate panel of the appellate court affirmed the trial court's conclusion that MidSouth could not enforce the amenities covenant by requiring payment from the individual homeowners under the 1975 and 1979 declarations. Watford v. MidSouth Golf, LLC, 215 N.C.App. 394, 716 S.E.2d 87 (2011)(unpublished disposition) (the "Homeowners Opinion "). The upshot of all this litigation, in grossly oversimplified terms, is that the amenity covenant is "out" such that the property owners represented by Fairfield are no longer paying the fees necessary to fund MidSouth's maintenance of the golf courses and recreational facilities; however, the maintenance covenant remains "in," requiring MidSouth to continue to provide those services based on its ownership of the Property and without compensation. Fairfield argues that the maintenance covenant is a real rather than personal covenant, such that whomever owns the Property—be it MidSouth or some other entity—likewise would be required to maintain and operate the golf courses and other amenities, without payment as contemplated by the amenities covenant. The threshold question now before the court is whether that maintenance covenant may be stripped from the Property in order to sell the Property in MidSouth's chapter 11 plan, free and clear of the maintenance obligation.

DISCUSSION

I. Effect of State Court Decisions

The parties are sharply divided about the extent to which state court litigation, and in particular the three decisions issued by the North Carolina Court of Appeals, are material to this bankruptcy case. Fairfield argues that the state courts specifically held that the maintenance covenant runs with the land; MidSouth contends that they held no such thing. Applicable here is the Rooker–Feldman doctrine, which embodies the "rule that a federal court cannot consider claims actually decided by a state court or claims inextricably intertwined with an earlier state court judgment" and prevents "state court losers" from seeking second bites from the decisional apple in federal court. In re Kimmel, 527 B.R. 215, 219 (Bankr.E.D.N.C.2015). As Fairfield emphasizes, to be "inextricably intertwined," the "granting of the relief sought by the plaintiff in the federal complaint must necessarily determine that the state court judgment was 'erroneously entered or must take action that would render the judgment ineffectual. " In re Hinson, 481 B.R. 364, 374 (Bankr.E.D.N.C.2012)(emphasis by Fairfield), quoted in Fairfield Mem. of Law Regarding Disposition of Threshold Issues at 14.

This court undertook a painstaking review of all three decisions, which devolved into a lengthy struggle to isolate precisely what these decisions do hold, what they don't hold, and to which parties each opinion pertains. That analysis led the court to the preliminary conclusion that the state courts had not ruled on the specific issue at hand, notwithstanding the fact that Fairfield (and originally, to a lesser extent, even the debtor) was certain that they had. In the interest of clarifying the extent of those holdings before proceeding further, the court requested the parties' submission of focused discussions and pinpoint citation in support of their interpretation of the Court of Appeals' opinions.

A. Parties' Arguments

According to Fairfield, the state courts necessarily found that the maintenance covenant is a real as opposed to personal covenant, and that conclusion (and therefore also the covenant) is inviolable in this court under the Rooker–Feldman doctrine. Fairfield maintains:

The North Carolina State Courts have specifically held that the 1993 covenants (Section Three, "Access and Use Restrictions and Affirmative Obligations") are not personal, required MidSouth ... as the owner of the property subject to those covenants, to "maintain and operate" the recreational amenities located thereon and that those covenants were enforceable by Fairfield.

Fairfield Harbour Prop. Owners Ass'n, Inc. v. Midsouth Golf, LLC, 215 N.C.App. 66, 79, 715 S.E.2d 273, 284 (2011). The issue regarding whether the 1993 Covenants were "personal" was actually litigated and decided against Midsouth, with summary judgment being granted affirmed [sic] on Midsouth'[s] contention (Eighth Defense) that the covenants were "Personal Covenants," as well as Midsouth's request to the court to "declare that the burdens imposed upon the owner of the amenities in Fairfield Harbour by the 1993 Covenants are personal covenants which are unenforceable against MidSouth." [citation to record omitted.] The trial court granted summary judgment against

...