In re Northlake Development, LLC, Case No. 06-01934-NPO (Bankr.S.D.Miss. 12/13/2007)
| Decision Date | 13 December 2007 |
| Docket Number | Adn. PocC. No. 06-00171-NPO.,Case No. 06-01934-NPO. |
| Parties | IN RE: NORTHLAKE DEVELOPMENT, LLC, CHAPTER 7, DEBTOR. KINWOOD CAPITAL GROUP, LLC AND GEORGE KINIYALOCTS, INDIVIDUALLY AND AS GENERAL PARTNER OF KINIYALOCTS FAMILY PARTNERS I, LTD., PLAINTIFFS, v. NORTHLAKE DEVELOPMENT, LLC AND BANKPLUS, DEFENDANTS. |
| Court | U.S. Bankruptcy Court — Southern District of Mississippi |
GRANTING AMENDED COMPLAINT
There came on for trial (the "Trial") the Amended Complaint (Adv. Dk. No. 25) filed by Kinwood Capital Group, LLC and George Kiniyalocts, Individually and as General Partner of Kiniyalocts Family Partners I, Ltd. (the "Plaintiffs") and the Answer of BankPlus to Amended Complaint (the "Answer") (Adv. Dk. No. 27) filed by BankPlus ("BankPlus") in the above-styled adversary proceeding (the "Adversary").1 James R. Mozingo and William M. Simpson represented the Plaintiffs. Edward E. Lawler and R. Keith Foreman represented BankPlus. The Court, having considered the pleadings and briefs as well as the testimony, exhibits, and arguments of counsel presented at Trial, finds that the Amended Complaint is well taken and should be granted as set forth herein. Specifically, the Court finds as follows:2
Jurisdiction
This Court has jurisdiction over the parties and the subject matter of this proceeding pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(H) and (K). Notice of the Trial on the Amended Complaint was proper under the circumstances.
I. The following facts are included in the Pretrial Order (Adv. Dk. No. 79) approved by the Court after conference with the parties unless otherwise noted:
A. First Bankruptcy Case
1. Northlake filed in this Court a voluntary petition for relief under chapter 11 of the Bankruptcy Code on August 18, 2005, which was assigned case no. 05-04348 (the "First Bankruptcy Case") (First Case Dk. No. 1). Michael Earwood ("Earwood") signed the petition as both attorney for Northlake and managing member of Northlake. Northlake listed certain property located in Panola County, Mississippi (the "Property"), as property of the estate in the First Bankruptcy Case (First Case Dk. No. 16).
2. During the pendency of the First Bankruptcy Case, Earwood, the sole owner and managing member of Northlake, and Thomas R. Hudson ("Hudson"), general counsel for BankPlus, entered into an agreement whereby Northlake would pay delinquent ad valorem taxes on the Property, maintain hazard and fire insurance on the improvements on the Property, and make adequate protection payments to BankPlus. The agreement was memorialized in an Order entered by the Court on November 7, 2005 (First Case Dk. No. 31), which called for the automatic stay to terminate if Northlake defaulted. On June 13, 2006, Hudson filed an Affidavit of Default (First Case Dk. No. 56), and the automatic stay purportedly terminated as to the Property by operation of law due to Northlake's default.
3. On November 15, 2005, the Court disqualified Earwood as attorney for the Debtor-inP-ossession in the First Bankruptcy Case based on his lack of disinterestedness (First Case Dk. No. 32).
4. The First Bankruptcy Case was dismissed by Agreed Order on June 28, 2006 (First Case Dk. No. 58). The Court entered the Final Decree/Order Closing Case on September 25, 2006 (First Case Dk. No. 64).
B. Second Bankruptcy Case
1. On September 14, 2006, on the eve of foreclosure by BankPlus, Northlake filed in this Court a second voluntary petition for relief under chapter 11 of the Bankruptcy Code, which was assigned case no. 06-01934 (the "Second Bankruptcy Case") (Second Case Dk. No. 1). Earwood signed the petition as managing member of Northlake, and Robert B. Childers ("Childers"), who practiced law with Earwood, signed the petition as attorney for Northlake. Id. The petition, however, neither listed the law firm name of Earwood & Childers, PLLC nor indicated that Earwood and Childers were in the same law firm. Id.
2. In the Second Bankruptcy Case, Northlake again listed the Property as property of the estate (Second Case Dk. No. 91).
3. On October 23, 2006, the Court entered an Order Granting Disqualification Motion (Second Case Dk. No. 40) which disqualified Earwood & Childers, PLLC, Earwood, and Childers from representing Northlake in the Second Bankruptcy Case.
4. Also on October 23, 2006, the Court converted Northlake's chapter 11 case to a case under chapter 7 (Second Case Dk. No. 41), and subsequently, the United States Trustee appointed the Trustee.
5. On November 3, 2006, the Court sanctioned Earwood, Childers, and Earwood & Childers, PLLC, jointly and severally, and ordered them to pay $2,182.50 in attorney's fees to BankPlus (Second Case Dk. No. 53) in connection with its Motion for Relief from Automatic Stay (Second Case Dk. No. 6).
C. The Adversary
1. Kinwood Capital Group, LLC ("Kinwood") is a Mississippi limited liability company formed on or about March 20, 1998 (Pretrial Order; Ex. P-2). Kinwood's initial members were George Kiniyalocts, an adult resident citizen of the State of Ohio and owner of eighty percent (80%) of the ownership interest of Kinwood, and Earwood, owner of twenty percent (20%) of the ownership interest of Kinwood (Pretrial Order; Exs. P-2 and P-4). Subsequently, George Kiniyalocts conveyed his interest in Kinwood to a family limited partnership, Kiniyalocts Family Partners I, Ltd., and has been its General Partner (Pretrial Order; Ex. P-7; Trial Tr. Vol. 1 at 1881-89).3 Kiniyalocts also transferred an additional five percent (5%) of the ownership interest in Kinwood to Earwood4 (Trial Tr. Vol. 1 at 45)5.
2. Northlake is a Mississippi limited liability company formed on or about June 27, 2000, whose sole owner and managing member is Earwood, an adult resident citizen of the State of Mississippi and an attorney with Fox, Earwood & Childers and, later, Earwood & Childers, PLLC (Pretrial Order; Ex. P-21; Trial Tr. Vol. 1 at 42).
3. BankPlus is a Mississippi banking corporation and a creditor of Northlake (Pretrial Order; Answer of BankPlus at ¶3).
4. On October 11, 2006, Plaintiffs filed this Adversary against Northlake and BankPlus asserting ownership of the Property and, inter alia, seeking to enjoin BankPlus from foreclosing on its purported security interest in the Property pending a determination of ownership (Adv. Dk. No. 1).
5. The Court granted a Temporary Restraining Order on October 16, 2006 ( ), and an Agreed Preliminary Injunction on November 15, 2006 ( ), which, in part, enjoined BankPlus from conducting a foreclosure sale on the Property and enjoined Northlake and Earwood from further conveying or encumbering the Property.
6. The Plaintiffs filed the Amended Complaint on December 14, 2006 ( ), and BankPlus filed its Answer on December 15, 2006 ( ).
D. Kinwood Background
1. Kinwood was at all pertinent times a member-managed limited liability company (Exs. P-2, 4). Kinwood's Certificate of Formation was filed with the Secretary of State by Earwood on behalf of Kinwood. The Certificate of Formation listed no restrictions in Paragraph 7 (Ex. P-2). Kinwood's Operating Agreement (the "Kinwood Operating Agreement") was never recorded (Pretrial Order).
2. On March 12, 1998, Kinwood acquired title to the Property at a foreclosure sale from the Trustee of First Security Bank for a price of $535,001 (Pretrial Order; Ex. P-3). The Property consists of approximately five hundred twenty (520) acres and improvements thereon located in the First Judicial District of Panola County, Mississippi (Pretrial Order; Ex. P-3). In order for Kinwood to acquire the Property, Kinwood, George Kiniyalocts and Earwood became indebted to Mellon Bank ("Mellon") for the sum of approximately $575,000 (Pretrial Order; Ex. P-5; Trial Tr. Vol. 1 at 160, 162-163). All three parties remain liable for said indebtedness (Pretrial Order; Trial Tr. Vol. 1 at 163). The Property was not pledged to secure the debt to Mellon, and after its purchase, no lien was placed against the Property by Kinwood (Pretrial Order; Ex. P-5; Trial Tr. Vol. 1 at 162-163; Trial Tr. Vol. 2a at 32).
E. Kinwood, Earwood and Novus Transactions
1. On April 7, 1998, $39,919 from the proceeds of the Mellon loan was deposited to the Kinwood bank account (Ex. P-74; Trial Tr. Vol. 1 at 84). In addition to the initial deposit of Mellon loan proceeds, Kiniyalocts transferred various amounts to Kinwood including $16,000 on August 26, 1998; $12,800 on November 13, 1998; $41,899.50 on August 28, 2000; $36,525 on August 31, 2000; $12,000 on June 9, 2005; and $25,000 on August 12, 2005 (Exs. P-74, 76; Trial Tr. Vol. 1 at 91, 137-139). During 1999, Gary Light paid Kinwood $50,000 in earnest money in connection with contracts to purchase the Property (see section I.F. below; Trial Tr. Vol. 1 at 122-124).
2. Prior to Kinwood's formation, Earwood had formed a limited liability company, Novus Capital Fund, LLC ("Novus"), on January 29, 1998 (Pretrial Order; Ex. P-1; Trial Tr. Vol. 1 at 66). During 1998, Earwood transferred $34,776.12 from the Kinwood account to his Novus account (Ex. P-74; Trial Tr. Vol. 1 at 88). During 1999, Earwood transferred $115,505.87 from the Kinwood account to his Novus account (Ex. P-74; Trial Tr. Vol. 1 at 89). In 2000, Earwood transferred $37,000 from Kinwood's account to the Novus account (Ex. P-74). In 2001, Earwood transferred $1,000 from Kinwood to Novus and $13,387.65 from Kinwood to Northlake. Id. In 2003, Earwood transferred $25,600 from Kinwood to Novus, $12,025 from Kinwood to Northlake, $300 from Kinwood to his son; and $1,865 from Kinwood to himself. Id.
3. Prior to Kinwood's purchasing the Property, certain lots in and around the Property had been sold to third parties. Kinwood's business plan included repurchasing those lots. Earwood used Kinwood funds to repurchase the lots but...
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