In re Schroeder, 3:21-bk-00707-LVV
| Decision Date | 01 December 2021 |
| Docket Number | 3:21-bk-00707-LVV |
| Parties | In re: Donald J. Schroeder, and Deirdre C. Schroeder, Debtors. |
| Court | U.S. Bankruptcy Court — Middle District of Florida |
In re: Donald J. Schroeder, and Deirdre C. Schroeder, Debtors.
No. 3:21-bk-00707-LVV
United States Bankruptcy Court, M.D. Florida, Jacksonville Division
December 1, 2021
Chapter 11
MEMORANDUM OPINION
LORI V. VAUGHAN JUDGE
The parties' dispute centers on a right of first refusal on an oceanfront home located in Fernandina Beach, Florida. The home is Debtors' homestead. Debtors propose to sell the homestead to the highest bidder and use a portion of the proceeds to fund their plan. Omni Amelia Island, LLC ("Omni") contends that the Debtors' filed their case in bad faith solely to avoid Omni's right of first refusal which was exercised prepetition and which resulted in litigation. Omni argues that the Court should reject Debtors' plan and grant stay relief for a variety of reasons including Debtors' alleged bad faith.
The disputes were brought before the Court for a trial on November 1, 2021 to consider: (i)
the Debtors' Combined Amended Disclosure Statement and Chapter 11 Plan of Reorganization (Doc. 89); (ii) the Debtors' Motion Authorizing Sale of Real Property Free and Clear of Liens (Doc. 16); (iii) the Debtors' Motion to Reject Omni's Disputed Right of First Refusal and to Establish a Bar Date for any Rejection Damage Claims (Doc. 32); and (iv) Omni's Alternative Motion for Relief from the Automatic Stay based on Bad Faith Filing (Doc. 101). As discussed below, the Court finds that the plan was not filed in bad faith and will confirm Debtors' plan over Omni's objections.
Background Facts
The Prepetition Auction
The Debtors own real property at 27 Ocean Club Drive, Fernandina Beach, Florida (the "Property"). The Property is scheduled as exempt homestead Property under Article X, section 4, of the Florida Constitution and Florida Statutes §§ 222.01 and 222.02. (Doc. 1, p. 22). Based on an appraisal dated April 19, 2021, the Debtors and Omni stipulate that the market value of the Property is $9, 700, 000.00. (Debtors' Ex. 3).
Prepetition, the Debtors entered into an Auction Marketing Agreement ("AMA") for the Property with Concierge Auctions, LLC ("Concierge"). (Omni's Ex. 1). The AMA provided that the Property would be sold at an auction conducted by Concierge without reserve. Id. At the insistence of Mr. Schroeder, the listing price on the Property was set at $12, 500, 000.00. The highest pre-auction bid, however, was submitted in the amount of only $3, 500, 000.00. At the auction, the highest bid received was the pre-auction bid of $3, 500, 000.00 by Donald W. Beam and Carla C. Beam (the "Beams"). After the Debtors and the Beams entered into a sales contract, Omni notified the parties of its intent to exercise its right of first refusal ("ROFR") "at the same purchase price and on the same terms" contained in the sales contract.[1] (Omni's Exs. 3, 5).
For various reasons, the Debtors objected to the auction process employed by Concierge and the resulting contract. Before the scheduled closing date of April 30, 2018, the Debtors advised Omni that they would not close. In response, Omni filed a state court action for breach of the sales contract and for specific performance against the Debtors in the Circuit Court of the Fourth Judicial Circuit in and for Nassau County, Florida (the "State Court Action"). Omni also recorded a Notice of Lis Pendens on April 27, 2018, at Official Records Book 2192, Pages 1441 et seq. of the public records of Nassau County, Florida. (Omni's Ex. 22). Contentious litigation ensued and matters were still pending in the State Court Action when the Debtors filed their petition.
Debtors' Bankruptcy
On March 25, 2021, the Debtors filed a voluntary petition for relief under Subchapter V of Chapter 11 of the United States Bankruptcy Code. After Omni and the U.S. Trustee objected to the Subchapter V election, Debtors filed an amended petition to remove the Subchapter V election (Doc. 68) and the case proceeded as a traditional chapter 11.
On April 1, 2021, the Debtors moved for Order (I) Authorizing Sale of Real Property Free and Clear of Liens, Claims, Encumbrances and Interests Pursuant to 11 U.S.C. § 363(b) and (f); (II) Establishing Bidding Procedures and Auction Sale Process; (III) Scheduling Auction and Sale Hearing to Consider Final Approval of Sale; and (IV) Granting Related Relief (the "Motion to Sell"). (Omni's Ex. 13). Omni objected to the Motion to Sell on the basis that the Debtors are under contract to sell the Property to Omni, and because the exempt homestead Property is not property of the estate subject to sale under 11 U.S.C. § 363. (Doc. 36).
On May 4, 2021, the Debtors' filed a Motion (I) for Authority to Reject Omni's Disputed
Right of First Refusal and (II) to Establish a Bar Date for any Rejection Damage Claims (the "Motion to Reject"). (Doc. 32). In the Motion to Reject, the Debtors maintain that Omni's purported ROFR may be rejected as an executory option contract under 11 U.S.C. § 365.
In conjunction with the Motion to Sell and Motion to Reject, the Debtors sought court approval to employ a broker for the marketing and sale of the Property. (Doc. 16). The Court subsequently authorized the request and entered an order permitting the Debtors to contract with Berkshire Hathaway HomeServices, Kassandria Brown and Hugh Williams (the "Broker"). (Doc. 43).
Debtors' Plan of Reorganization
On June 22, 2021, the Debtors filed their Disclosure Statement and Chapter 11 Plan of Reorganization (Doc. 60), which was amended on August 3, 2021 (Doc. 89) (the "Initial Plan"). The Initial Plan provides that the Property will be sold through an auction process and the proceeds used, in part, to fund payments to creditors. (Doc. 89, pgs. 12, 13). Subsequently, the Broker secured a contract for the sale of the Property to an Initial Contract Purchaser for $5, 000, 000.00 cash on an "as is" basis (the "Initial Contract"), with the sale being subject to approval by the Court. (Doc. 170).
Shortly before trial, the Debtors filed a Housekeeping Combined Amended Disclosure Statement and Chapter 11 Plan of Reorganization (the "Plan"). (Doc. 127). The Plan differs from the Initial Plan only in the treatment of two classes of creditors with whom the Debtors reached an agreement.[2]
Under the Plan, creditors are classified as follows:
Class 1: Secured Claim of Regions Bank
Class 2: Secured Claim of the Nassau County Tax Collector.
Class 3: Claim of Berger Singerman LLP
Class 4: Claim of Donald and Carla Beam
Class 5: Secured Claim of David Walker.
Class 6: Claim of Omni Amelia Island, LLC
Class 7: General Unsecured Claims.
(Doc. 127, pg. 6). All classes are impaired except for Class 1 (Regions Bank) and Class 2 (Nassau County Tax Collector), which are both unimpaired.[3]
The Plan reflects the settlement agreements reached with Berger Singerman and the Beams by which their claims would be treated as partially secured and partially unsecured. (Doc. 127, pgs. 12, 13). Berger Singerman filed a secured proof of claim for $299, 129.48 in unpaid attorney's fees related to the State Court Action relying on a charging lien provided for in their engagement agreement. (Debtor's Ex. 4). Under the Plan, Berger Singerman will be paid $100, 000.00 out of the sale with the balance paid pro rata with unsecured claims in Class 7. (Doc. 127, pg. 12).
The Beams filed a secured claim for $1, 105, 000.00 based on a mortgage the Debtors granted the Beams in a prepetition settlement agreement.[4] (Debtor's Ex. 4). The Plan proposes to pay the Beams $250, 000.00 out of the sale of the Property (or $500, 000.00 if the sale closes for $5, 500, 000.00 or more) with the balance paid pro rata as an unsecured claim in Class 7. (Doc. 127, pg. 13). Omni filed a secured claim based on the ROFR, but its claim is treated as a general unsecured claim paid pro rata with Class 7 because of this Court's Order Sustaining Objection to Secured Status. (Doc. 117).
Payment to Class 7 general unsecured creditors will depend on the results of the auction. Creditors will receive a minimum distribution of $100, 000.00. (Doc. 89, pg. 11). Further, for each $500, 000.00 increase in the sales price of the Property above $4, 000, 000.00, the Plan will distribute an additional $50, 000.00 to unsecured creditors. Id. If the Property is sold at the Initial Contract price of $5, 000, 000.00, the holders of allowed unsecured claims will receive a pro rata distribution of $200, 000.00 under the Plan. The following chart illustrates the potential recoveries for general unsecured creditors:
Home Sales Price
Amount Paid to Unsecured Creditors
(Doc. 110, pg. 6).
Debtors' creditors, except for Omni and Amelia Island Plantation Real Estate Services, LLC ("AIPRE") support the proposed Plan.[5] Omni objects to the approval of the Disclosure Statement and Confirmation of Debtors' Plan on the basis that the Plan fails to satisfy the requirements under 11 U.S.C. § 1129 and should be dismissed as a bad faith filing. (Docs. 126, 135, 169). Omni also maintains that the Property is not subject to sale under 11 U.S.C. § 363, and that if the ROFR is rejected under 11 U.S.C. § 365 Omni will acquire a constructive trust over the sale proceeds.
Trial on Confirmation of the Plan, Stay Relief, and Related Matters
On September 1, 2021, Omni filed a Motion for Order Confirming Absence or Termination of the Automatic Stay, or, in the Alternative, for Relief from Stay (the "Stay Relief Motion") based
on allegations that the Debtors filed the case in bad faith. After a hearing on September 28, 2021, the Court denied Omni's request and reserved the remaining question of the Debtors'...
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