In re Royal West Properties, Inc.
| Decision Date | 29 December 2010 |
| Docket Number | No. 09-20334-BKC-RAM,09-20334-BKC-RAM |
| Parties | In re ROYAL WEST PROPERTIES, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of Florida |
Harold D. Moorefield, Jr., Esq., Stearns Weaver Miller Weissler, Alhadeff & Sitterson, P.A., Miami, FL, for Trustee.
Phillip M. Hudson, III, Esq., Arnstein & Lehr, LLP, Miami, FL, for Alicia and Manuel Rodriguez & RBI-2120 Real Estate, Inc.
David Samole, Esq., Kozyak Tropin & Throckmorton, P.A., Coral Gables, FL, for Royal Trust.
This Chapter 7 case includes hundreds of individual creditors who invested money with the Debtor and purportedly received assignments of individual notes and mortgages to secure the Debtor's obligations to them. The case has spawned substantial litigation over the validity of the secured claims filed by the investors. This opinion and Order will resolve the remaining legal issues raised in the Chapter 7 Trustee's Amended Generic Objections to Investors' Secured Claims (the "Generic Objection") [DE# 330].
Royal West Properties, Inc. ("Debtor") is a Florida corporation owned and controlled by Gaston E. Cantens and his wife, Teresita Cantens. For over twenty-five years, the Debtor was engaged primarily in the business of (a) acquiring, owning, selling, and financing the sale of vacant real estate lots ("Lots"), typically one-quarter to one-half acre in size, primarily located in Collier County, Charlotte County and Lee County, Florida and (b) servicing the notes and mortgages generated from the sale of the Lots.
The Debtor sold the Lots for approximately $10,000 to $50,000 ("Purchase Price") per Lot to customers (the "Lot Purchasers"). The Debtor typically financed the Lot Purchasers' purchase of Lots by accepting purchase money notes and mortgages for a substantial portion of the Purchase Price. In fact, to encourage sales, the Debtor would often finance the Purchase Price with little or no money down. The Lot Purchasers issued a promissory note ("Mortgage Note") to the Debtor for the amount financed and granted a mortgage ("Mortgage") to the Debtor encumbering the purchased Lot. The Mortgage Notes and Mortgages are collectively referred to in this Opinion as the "Mortgage Receivables."
In order to raise capital to finance its real estate business, the Debtor solicited investors ("Investors") to loan money to the Debtor. These loans ("Investor Loans") were evidenced by a promissory note issued by the Debtor to the Investor ("Investor Note"). The Debtor solicited Investor Loans by purportedly offering the Investors a high interest rate and by providing security to the Investors to secure the obligations. Specifically, the Debtor's obligations under many of the Investor Notes were purportedly secured by an assignment of certain Mortgages ("Assignment") which the Debtor held from the sale of its Lots to the Lot Purchasers.
Some of the Assignments were recorded in the public records of the county where the Lots encumbered by the Mortgages were located. On their face, the Assignments appear to be a "sale" of the Mortgages, but in fact, the parties did not intend the Assignments to be an absolute sale of the Mortgages. Rather, the parties intended the Assignments to be collateral assignments of the Mortgages to secure repayment of the Investor Notes. The Court's legal conclusion on the nature of the Assignments is set forth in the Court's December 28, 2009 Order Granting Trustee Dillworth's Motion to Determine Nature and Extent of Investors' Interests in Mortgage Receivables (the "December 28th Order") [DE# 299]. That Order and the contested matter resolved by the Order are discussed in more detail later in the Opinion.
Based upon Trustee Dillworth's review of the Debtor's records, nearly all cash received by the Debtor, whether from the payment of a Mortgage Receivable, sale of a Lot in inventory, or from an Investor Loan, flowed through a single Debtor operating account. Also, nearly all payments to Investors and ordinary course of business creditors were made from that same operating bank account. The Debtor paid obligations owed to Investors without regard to whether the Debtor was receiving payments on a Mortgage Note assigned to an Investor. Particularly, more recently after the real estate market collapsed, the Debtor used the proceeds from new Investor Loans to fund the Debtor's general business obligations and make payments due on old Investor Loans.
At various court hearings in this case, the Chapter 7 Trustee has alleged that the Debtor was operated as a Ponzi scheme for a significant period prior to the filing of the bankruptcy case. Whether or not the business activities fit that description, the end result is clear. Unpaid Investor Loans greatly exceed the value of the assets in this estate.
On May 27, 2009 ("Petition Date"), three creditors of the Debtor filed an involuntary petition under Chapter 11 against the Debtor. On June 29, 2009, the Debtor filed an Emergency Motion for the Appointment of Trustee (the "Trustee Motion") [DE# 12], which included the Debtor'sconsent to entry of an Order for Relief. On July 1, 2009, the Court entered the Order for Relief [DE# 15] and an Order granting the Trustee Motion [DE# 16]. On August 10, 2009, the Court entered an Order [DE# 68] converting this case to a Chapter 7 case, and on August 12, 2009, the U.S. Trustee's Office appointed Trustee Dillworth as the Chapter 7 Trustee [DE# 72].
An overwhelming majority of the debt in this case is owed to the Investors who loaned money to the Debtor over the course of the last fifteen years. As of the Petition Date, the principal amount due to Investors exceeded $47 million.
The Debtor's assets include approximately 750 separate Mortgage Receivables encumbering approximately 950 Lots sold by the Debtor to its customers, the Lot Purchasers. As of the Petition Date, the unpaid balance of the Mortgage Receivables owed to the Debtor by Lot Purchasers was approximately $17 million.
When Trustee Dillworth was appointed, the Debtor's business operations had effectively collapsed under the weight of the $47 million due the Investors. The Debtor's financial condition was further impacted by a deteriorating real estate market resulting in a limited demand for the remaining Lots in the Debtor's inventory and by the increasing percentage of Mortgage Receivables which had become non-performing.
To administer this case, Trustee Dillworth needed first to establish that the Mortgage Receivables were property of the estate assigned as collateral to the Investors, not assets that were absolutely assigned to the Investors. Second, if the Mortgage Receivables were assigned as collateral, the Trustee needed to determine which Investors had perfected their security interests.
The first and a portion of the second issue were resolved in the Court's December 28th Order, referred to earlier. That Order granted Trustee Dillworth's Motion to Determine Nature and Extent of Investors' Interests in Mortgage Receivables which was filed on September 3, 2009 (the "Trustee's First Omnibus Motion") [DE# 111]. The December 28th Order contained the following legal conclusions which determined the status of many of the Investor claims:
A. The Assignments of the Mortgage Receivables were collateral assignments to secure repayment of the Investor Notes, not absolute assignments which transferred ownership of the Mortgage Receivables to the Investors. Therefore, on the Petition Date, the Mortgage Receivables were property of the estate;
B. To have a valid, enforceable security interest in an assigned Mortgage Receivable, an Investor had to perfect its security interest under the applicable provisions of Florida's Uniform Commercial Code ("UCC"). Recording the Assignments in accordance with the real estate recording statutes was not sufficient; and
C. To perfect under the UCC, an Investor had to either file a UCC-1 financing statement under Fla. Stat. § 679.3121(1), or have possession of the original Mortgage Note which perfects the security interest under Fla. Stat. § 679.3131(1). A perfected security interest in the Mortgage Note automatically perfects a security interest in the corresponding Mortgage under Fla. Stat. § 679.3081(5).
The conclusions in the December 28th Order carried the Trustee a good way down the road in determining which Investors held perfected security interests in the Mortgage Receivables on the PetitionDate. Still, a host of different factual scenarios generated additional legal issues which remained unresolved. These issues, more particularly described below, were framed in certain stay relief motions filed by Investors (the "Investor Stay Relief Motions") 1 and in the Generic Objection.
The Generic Objection addressed the following four general categories of remaining issues related to the Investor claims:
A. How to deal with postpetition proceeds derived from Mortgage Receivables in which Investors have perfected security interests including, in particular, the Trustee's request to retain a portion of the proceeds as reimbursement for the expenses of collection;
B. Situations where the Lot Purchasers no longer had title to the Lots subject of the Assignments. These included situations in which the Debtor foreclosed and took back title or obtained title by accepting a deed in lieu of foreclosure;
C. Situations in which the Debtor assigned a Mortgage Receivable, but never closed on the sale of the Lot subject to the Mortgage Receivable; and
D. Situations in which the Mortgage Receivable was compromised or settled by the Debtor and Lot Purchaser resulting in the Debtor releasing the Lot Purchaser from any remaining obligations under the Mortgage Note.
Several Investors filed responses to the Generic Objection. The issues were also...
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