In re Nation's Capital Child And Family Dev. Inc.

• Court: United States Bankruptcy Courts – District of Columbia Circuit
• Writing for the Court: S. MARTIN TEEL, JR., Bankruptcy Judge.
• Citation: In re Nation's Capital Child And Family Dev. Inc., 457 B.R. 142 (Bankr. D.C. 2011)
• Decision Date: 28 September 2011
• Docket Number: Adversary No. 09–10019.,Bankruptcy No. 09–00576.
• Parties: In re NATION'S CAPITAL CHILD AND FAMILY DEVELOPMENT, INC., Debtor.Nation's Capital Child and Family Development, Inc., Plaintiff,v.Marylyn Tree, LCC, et al., Defendants.

457 B.R. 142

In re NATION'S CAPITAL CHILD AND FAMILY DEVELOPMENT, INC., Debtor.Nation's Capital Child and Family Development, Inc., Plaintiff,

v.Marylyn Tree, LCC, et al., Defendants.

Bankruptcy No. 09–00576.

Adversary No. 09–10019.

United States Bankruptcy Court, District of Columbia.

Sept. 28, 2011.

Curt S. Hansen, Hansen & Associates, P.C., Jeffrey M. Sherman, Jackson & Campbell, Washington, DC, for Plaintiff.Kenneth J. Loewinger, Michael E. Brand, Loewinger & Brand, PLLC, Washington, DC, Carroll Draper Hauptle, Law Offices of Carroll Hauptle, Alexandria, VA, Samuel M. Shapiro, Rockville, MD, for Defendants.Greenlight International, Inc., pro se.Tyrone Green, pro se.

MEMORANDUM DECISION

S. MARTIN TEEL, JR., Bankruptcy Judge.

In July 2010, the court held a four-day trial in the above-captioned adversary proceeding on the plaintiff's claims. The following represents the court's findings of facts and conclusions of law.

I

The plaintiff, Nation's Capital Child and Family Development (Nation's Capital), is a non-profit organization that provides child care services to underprivileged children in the District of Columbia. Nation's Capital was founded in 1964 and by 1999 had grown to include 27 child care centers. In 1996, as part of its expansion efforts, Nation's Capital purchased property at 2229 M Street, N.E., and undertook a $1.3 million renovation of the property for use as a child care center. The renovation was financed by a District of Columbia bond issue, with Wachovia Bank serving as the indenture trustee and holding a lien on Nation's Capital's properties to secure the debt.

In the fall of 2006, Nation's Capital began to experience financial difficulties. In that year, Nation's Capital lost major sources of federal and state funding for its child care centers. As a result, Nation's Capital was forced to close down all of its centers except for the center at the newly-renovated M Street property. The revenues from this remaining center were insufficient to service the debt on the bond, and Nation's Capital fell behind on the loan. In the spring of 2007 Wachovia proceeded to foreclose on the property.

In an effort to keep the center operating, Nation's Capital began looking for someone to purchase the M Street property at foreclosure and lease it back to Nation's Capital. In March 2007, Travis Hardmon, Nation's Capital's president and CEO, met with David Cameron about filling this role. David Cameron was vice president and part-owner of Seville Builders, a construction company that had done part of the demolition work on the M Street property renovation. Cameron agreed on behalf of Seville to attempt to purchase the property at the foreclosure sale.

The successful bidder at the foreclosure sale was required to put down a $50,000 deposit. Although Seville had sufficient funds for the deposit at the time Cameron had agreed with Hardmon to purchase the property, as the foreclosure sale date approached it found itself running short of money. During this time, Seville was involved in a construction project on Wisconsin Avenue. Although not an owner of the property, Seville had agreed to guarantee the loan financing the project. Prior to the foreclosure sale, the bank funding the Wisconsin Avenue project cut off funding and Seville opted to put the $50,000 it had intended to use as a deposit on the M Street foreclosure sale into the Wisconsin Street project. To enable Seville to purchase the M Street property, Hardmon arranged for a loan of $125,000 to Seville from H & H Investments, a real estate investment company owned by Hardmon's parents. The loan was for three years, payable in full at the end of the term. Of the $125,000, $50,000 was to go towards the foreclosure sale deposit. Seville used the other $75,000 to provide additional funding for the Wisconsin Avenue project. At the foreclosure sale on May 9, 2007, Seville was the successful bidder on the property at a price of $802,000.

After the foreclosure sale, Cameron approached Cardinal Bank about financing the remainder of the purchase price. As a condition to making the loan, Cardinal required Seville to have a lease in place with Nation's Capital that provided for a minimum of $15,000 a month in rent and a $150,000 security deposit by Nation's Capital. As additional collateral, Seville was to place $100,000 on deposit with the bank. That $100,000 and the balance of the purchase price was to be financed by Cardinal and secured by the M Street property. Trial Tr. 50, July 19, 2010. Nation's Capital retained Arent Fox to represent it in negotiating the lease with Seville. Arent Fox made several modifications to the draft lease Cameron gave Nation's Capital, including, as relevant to this proceeding, decreasing the security deposit from $150,000 to $7,500. Cameron accepted all of Arent Fox's changes, except for the change in the security deposit amount, which he left at $150,000. Some time between June 16, 2007, and October 2007, Hardmon, on behalf of Nation's Capital, executed the lease with Seville. The effective date on the lease was May 24, 2007.

After the parties executed the Seville lease, Seville decided it would be better if the M Street property were held in the name of a single-purpose entity. Towards that end, Cameron set up Marylyn Tree, LLC, a Nevada corporation and the named defendant in this adversary proceeding. On October 2, 2007, in anticipation of Marylyn Tree becoming the owner of the property, Nation's Capital and Marylyn Tree entered into a lease agreement on the M Street property that was substantively identical to the lease Nation's Capital had executed with Seville, except for two material differences. First, the Marylyn Tree lease set the security deposit at $15,000. Second, the Marylyn Tree lease provided for a “first right to purchase”:

FIRST RIGHTS; Landlord agrees to give first right to purchase, notify Travis Hardmon of any and all changes to the property and building that may effect [sic] the security and future of the tenant; The Board of Directors of the Nation's Capital Child & Family Development, Inc. [s]hall be notified to any changes in changes [sic] to the financial ownership of premises at 2229 M Street NE, Washington, DC 20002.

Ex. 5, Lease, ¶ 4.6(B).

On October 12, 2007, Seville and Marylyn Tree closed on the property. ¹ Wachovia transferred title to the M Street property to Seville through a substitute trustee's deed at the $802,000 foreclosure sale price. Less the $50,000 deposit and plus closing costs, Seville was required to deliver $777,603.50 at closing, and it raised sufficient funds for that purpose through its sale of the property to Marylyn Tree. Seville, in turn, transferred title to Marylyn Tree at a sales price of $1,200,000. Seville received $850,000 in cash from Marylyn Tree at closing and took a note for $350,000 from Marylyn Tree for the remainder of the sales price. Marylyn Tree partially financed the purchase from Seville with a $900,000 loan from Cardinal Bank ($100,000 of which went for the CD on deposit with Cardinal). The Cardinal note was secured by a deed of trust and an Assignment of Leases, Rents, and Security Deposit. Notably, the Assignment of Leases referred to the May 24, 2007, lease, the lease between Nation's Capital and Seville, not the new lease between Nation's Capital and Marylyn Tree that had the $15,000 security deposit and the “first right to purchase.” Seville secured its $350,000 note from Marylyn Tree with a deed of trust on the M Street property, which it agreed to subordinate to Cardinal's. All told, then, the loans to Marylyn Tree secured by the M Street property totaled $1,250,000, with the $100,000 Cardinal CD serving as additional collateral on the Cardinal loan. Nation's Capital was unaware that Seville would take a deed of trust on the M Street property at the time it executed the Marylyn Tree lease.

On October 15, 2007, after settlement on the M Street property, Hardmon, on behalf of Nation's Capital, executed an Estoppel Certificate to Cardinal Bank. Like the Assignment of Rents, the Certificate referenced a “Lease Agreement dated May 24, 2007 (the “Lease”) by and between Seville Builders, Inc., as landlord, and Nation's Capital Child & Family Development, Inc. a District of Columbia non-profit Corporation (the “Tenant”) as assigned by Seville Builders, Inc. to Marylyn Tree, LLC....” In the Certificate, Hardmon certified, as relevant here, (1) the Seville lease was “in full force and effect and ha[d] not been modified, assigned, suble[t], supplemented, amended or otherwise changed,” (2) Nation's Capital had put down a $150,000 deposit, and (3) Nation's Capital had “no unwaived options or right of first refusal ... with respect to purchasing any of the Premises.” The Certificate made no reference to the Marylyn Tree lease, the terms of which were inconsistent with these representations.

In November 2007, Nation's Capital began to comply with its obligations under the Marylyn Tree lease. During that month, Nation's Capital paid the $15,000 security deposit due to Marylyn Tree under the October 2, 2007, lease, and made a rental payment of $7,500 in December 2007. In January 2008, Nation's Capital and Marylyn Tree agreed to a temporary rent reduction ² which was memorialized in a letter from Cameron dated January 2, 2008. Under the terms of that agreement, Nation's Capital was to pay rent at the reduced rate of $8,500 per month from January 2008 through September 2008, with the amount by which the rent was reduced, $58,500, due in full by December 31, 2008.

During this period, Seville continued to experience cash shortfalls on its Wisconsin Avenue project and Cameron took several actions with respect to the M Street property in efforts to provide Seville with more funds for the project. First, on May 1, 2008, Cameron caused Seville to assign the $350,000 promissory note from Marylyn Tree to Mid–Atlantic Federal Credit Union, the lender on...