In re Oakhurst Lodge, Inc.

• Decision Date: 28 March 2018
• Docket Number: Case No. 11–17165–A–11
• Parties: IN RE: OAKHURST LODGE, INC., Debtor.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Eastern District of California

582 B.R. 784

IN RE: OAKHURST LODGE, INC., Debtor.

Case No. 11–17165–A–11

United States Bankruptcy Court, E.D. California.

Argued and submitted on November 15, 2017

Signed March 28, 2018

Donna M. Standard, Attorney at Law, for Oakhurst Lodge, Inc.; Aaron J. Malo and Robert K. Sahyan, Sheppard, Mullin, Richter & Hampton, LLP for First–Citizens Bank & Trust Company; Sonia Plesset Edwards, Wright, Finlay & Zak, LLP for Total Lender Solutions, Inc.; Michael Heath, Law Offices of Michael Heath, for Oakhurst Lodge, LP; Steven K. Marshall, in propria persona

MEMORANDUM

Fredrick E. Clement, United States Bankruptcy JudgeA debtor that owned and operated a motel encumbered by a bank's liens filed chapter 11¹ bankruptcy. It confirmed a reorganization plan that maintained the automatic stay in effect post-confirmation and restructured its secured and unsecured debt. The confirmed plan binds. It obligates the debtor to pay creditors over time the amounts specified in the plan and creditors to withhold collection efforts while receiving their plan payments.

But the bank violated the stay by foreclosing its liens. This violation precluded the debtor from paying creditors the amount promised in the plan. Later, the debtor and the bank settled the stay-violation dispute for one-half of the amount promised to creditors under the plan. The settlement also did not disturb the foreclosure sale or restore ownership of the motel to the debtor. At the bank's request, should the court now enforce the settlement?

I. FACTS

A. Chapter 11 Filing

Oakhurst Lodge Inc. ("Oakhurst Lodge") owned and operated a 60–room motel. It had several shareholders including Steven Marshall ("Marshall"), Chet Patel, and Sam Patel.

Unable to meet its financial obligations and wishing to continue operations, it filed a chapter 11 bankruptcy. Its most significant asset was the motel, as well as the fixtures, furniture and equipment necessary to operate it. Liabilities included seven secured debts, aggregating $3.9 million dollars.² The bulk of its secured debt encumbered the motel and the land on which it sits. Those secured creditors include: (1) First–Citizens Bank & Trust Company ("First–Citizens Bank"), which held notes for $3.08 million dollars secured by first and second trust deeds; (2) the Collier Partnership ("Collier Partnership"), which held a note for $324,000 secured by a third trust deed; (3) the Olsen Family Trust ("Olsen Trust"), which held a note for $392,000 secured by a fourth trust deed; and (4) the County of Madera, which was owed secured real property taxes of $125,000. Oakhurst also owed priority unsecured tax debt of $202,000,³ non-priority unsecured debt owed to non-insiders of $112,000,⁴ and non-priority unsecured debt owed to insiders of $493,000.⁵

Oakhurst Lodge proposed, and confirmed, a five-year plan of reorganization. Funded by a one-time capital contribution of $230,000 from shareholders and by 60 monthly payments of $31,000 to $33,000 from motel operations, the plan had five key components. First, it restructured the secured debts owed to First–Citizens Bank, the Collier Partnership, and the Olson Trust. It reamortized First–Citizens Bank's notes with a 22–year period of monthly payments and the entire debt becoming due and payable at the end of the 22–year period. It deferred payments for 12 months on the Collier Partnership's secured debt, added accrued but unpaid interest to the principal amount of the debt, reamortized the debt over 30 years with an interest rate of 5.5% and with monthly payments commencing in the 13th month following confirmation, and fixed a maturity date on the entire debt that was 11 years after plan confirmation. It deferred payments on the Olson Trust's secured debt until First–Citizens Bank's entire secured debt was paid in full, provided an interest rate of 6% on such debt, and fixed a maturity date on the entire debt falling immediately after payment of First–Citizens Bank's secured debt. Each of these creditors retained its lien.

Second, excepting unsecured debt due insiders, over its five-year life, the plan paid (usually with interest) short-term secured debt, priority tax debt, and unsecured debt. The secured property tax debts owed to Madera County were to be paid in full with 5% interest. Both debts secured by personal property were reamortized over 5 years and were to be paid in full including 4% interest. Priority unsecured tax debt was to be paid in full plus unquantified statutory interest. Unsecured debts held by non-insiders were to be paid in full without interest. The plan paid insider unsecured creditors nothing.

Third, the rights of existing equity holders were terminated. In exchange for a capital contribution of $230,000, Steven Marshall and Jack Patel became the new equity holders, each having an equal interest in Oakhurst Lodge.

Fourth, the plan deferred the discharge until completion of payments under the plan. It did not revest estate property upon confirmation in Oakhurst Lodge as a reorganized debtor. Thus, it retained the protections of the automatic stay over the 5–year lifespan of the confirmed plan.

Fifth, the plan reserved to Oakhurst Lodge all claims and rights against third parties, regardless of whether they arose before or after the petition or whether they arose before or after confirmation.

At confirmation, unpaid professional fees aggregated $12,000.⁶ And the plan obligated Oakhurst Lodge to pay these administrative expenses in full in cash after such amounts were allowed by the court.⁷

Unfortunately, Oakhurst Lodge did not fully perform its obligations under the confirmed plan.⁸

B. Foreclosure Sale

Four months after confirmation, First–Citizens Bank commenced proceedings to foreclose its trust deeds encumbering the motel. It did not first obtain relief from the automatic stay. Approximately ten months after plan confirmation, the bank completed its foreclosure. At the foreclosure sale, First–Citizens Bank was the successful bidder and acquired title to the property.

After acquiring title to the motel, First–Citizens Bank evicted Oakhurst Lodge, Inc. and sold the motel to Oakhurst Lodge, LP, an entity similar in name but unrelated to Oakhurst Lodge. Oakhurst Lodge, LP has operated the motel since acquiring it.

C. Conversion and Dismissal

About the time that First–Citizens Bank completed its foreclosure sale, the U.S. Trustee filed its motion to convert the case to chapter 7 or dismiss it. It did so because Oakhurst Lodge had not filed three post-confirmation quarterly operating reports and had not paid the post-confirmation fees due the U.S. Trustee. This court granted the motion and converted the case to chapter 7.

Shortly after his appointment, the chapter 7 trustee gave notice of an intent to abandon the "60–unit motel with residence" and "all fixtures and equipment involved in the operation of the motel." When timely opposition was not filed in response, the trustee abandoned the motel, residence, and the fixtures and equipment used for its operation.⁹

After Oakhurst Lodge failed to appear at two meetings of creditors, the trustee moved to dismiss the chapter 7 case. The court dismissed the case. The chapter 7 trustee issued a report of no distribution, and the clerk closed the case.

D. Stay–Violation Litigation

Next, Oakhurst Lodge commenced an action against First–Citizens Bank in state court. This litigation continued unresolved for two years.

It then filed an adversary proceeding in bankruptcy court against First–Citizens Bank, Oakhurst Lodge, LP (the ultimate buyer of the motel), and Total Lender Solutions (the party who conducted the sale). Though the adversary complaint pleads causes of action for quiet title, cancellation of instruments, constructive trust, and civil contempt, the factual basis for each claim is the foreclosure of the motel in violation of the stay.

E. Mediation and Settlement

In the adversary proceeding, this court ordered the parties to mediation and appointed a mediator. After mediation, the parties reached a resolution of the dispute and reduced their settlement to writing.¹⁰ Marshall signed the settlement agreement as president of Oakhurst Lodge. Notwithstanding admonitions by the court prior to the mediation, Marshall believed that any settlement funds received need not be remitted to creditors according to the terms of the confirmed plan.

The settlement required approval by this court. It provided First–Citizens Bank would waive any right to further payment under its notes secured by the first and second deeds of trust and would pay Oakhurst Lodge $850,000 in exchange for a release of claims and dismissal of pending litigation.¹¹ The settlement contains an implied corollary: First–Citizens Bank's foreclosure sale would remain effective and its buyer would retain the motel.

F. Vacated Orders

Later, this court vacated the order converting the case to chapter 7 and the order dismissing the chapter 7. This restored Oakhurst Lodge's case to chapter 11.

II. PROCEDURE

Oakhurst Lodge, acting through Marshall, repudiated the settlement agreement with First–Citizens Bank. First–Citizens Bank has responded by filing the present motion to enforce the settlement agreement.

The other adversary proceeding defendants have joined in the motion. Oakhurst Lodge and Steven Marshall, acting as an equity holder, oppose the motion.

III. JURISDICTION

This court has jurisdiction to decide this motion. At the outset of a chapter 11 case, the bankruptcy court's subject matter jurisdiction extends not only to the case but also to civil proceedings arising under title 11 or arising in or related to the case. 28 U.S.C. § 1334(a) – (b) ; see also General Order No. 182 of the Eastern District of California. The court also has broad subject matter jurisdiction over all property of the debtor as of the commencement of the case and all property of the estate. 28 U.S.C. §§ 1334(e) ; see also In re Millenium Seacarriers, Inc., 419 F.3d 83, 96 (2d Cir. 2005). After confirmation of a plan, ...