In re Seven Springs, Inc., Bankruptcy No. 91-25189-T
| Decision Date | 14 April 1993 |
| Docket Number | Adv. No. 92-2030-T.,Bankruptcy No. 91-25189-T |
| Citation | 159 BR 752 |
| Court | U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | In re SEVEN SPRINGS, INC., Debtor. SEVEN SPRINGS, INC., Plaintiff, v. Neil ABRAMSON, Chesapeake Golf, LP, Richard W. Hudgins, Trustee, Maurice Steingold, Jerbam, Inc., George Hodor, Leon Pollack, Patsy Kole, Glen McCarthy, City of Chesapeake, Defendant. |
John L. Smith, Jr., Outland, Gray, O'Keefe & Hubbard, Chesapeake, VA, for Maurice Steingold and Jerbam, Inc.
Bruce H. Matson, William A. Broscious, Otto Konrad, Hazel & Thomas, P.C., Richmond, VA, for Seven Springs, Inc.
Joseph R. Mayes, Virginia Beach, VA, for Patsy Kole.
Richard W. Hudgins, Newport News, VA.
William F. Devine, Hofheimer, Nusbaum, McPhaul & Samuels, Norfolk, VA.
John D. Padgett, Jett, Berkley, Furr & Padgett, Norfolk, VA.
On October 8 and 9, 1992, trial was held in this adversary proceeding on the debtor Seven Springs' complaint to quiet title to real property. Although there are a number of claims against the property held by various defendants, the only matter still in dispute is raised by a counterclaim of defendant Maurice Steingold. The counterclaim asserts that Steingold and other creditors of Vidco, Inc., hold a security interest in the subject real property. Subsequent to trial the parties have filed briefs.
For reasons stated in this opinion, Steingold's counterclaim will be denied and judgment entered on the complaint in favor of the plaintiff Seven Springs, subject to the undisputed other claims against the property.
In August 1983 a holding company called the Hodges Trust purchased a 464 acre tract of real estate located in Chesapeake, Virginia ("original tract"). The sole purpose of the Hodges Trust was to purchase and hold this property in trust for Vidco, Inc. ("Vidco").1 At the time of the purchase Vidco contracted with the Hodges Trust for options to purchase the property in segments staggered over a four year period. Vidco intended to turn the original tract into a golf course and country club surrounded by a residential community called Las Gaviotas. Lenders financing this project included Maurice Steingold and other entities in which Steingold held interests.
Although Vidco had not purchased all of the property, the company developed and made improvements to the entire original tract; this included laying the sewer system, building roads, constructing buildings, grading and seeding the golf course. Vidco was in the midst of financial difficulties when the option to purchase a 52 acre segment which it had developed into eight holes of the golf course ("eight holes parcel") was scheduled to expire. Vidco had approached a number of potential lenders, including Kennedy Funding, Inc., and Stockbridge Funding, Inc. ("Kennedy and Stockbridge")2 but failed to arrange financing. Vidco had also approached Steingold for additional loans. Although Steingold urged Vidco to exercise the option, he was unwilling to provide the necessary funding. In March 1988, approximately a month after Vidco's option to buy the eight holes expired, Kennedy and Stockbridge purchased the eight holes parcel from the Hodges Trust for $493,000.00.3 The instrument of conveyance was a deed of bargain and sale (in fee simple) from Hodges Trust to Kennedy and Stockbridge. (Steingold/Jerbam Exhibit A).
After they acquired title Kennedy and Stockbridge gave Vidco an option to purchase the eight holes parcel for $650,000.00; this option was periodically renewable upon Vidco's payment of renewal fees. In return Vidco extended an option to Kennedy and Stockbridge to purchase the other ten holes of the golf course, the part of the golf course Vidco had purchased from Hodges Trust. Vidco continued to have financial problems, and although the corporation paid for at least one extension of its option to buy the eight holes parcel, it could not find a lender willing to finance the purchase. No longer able to pay extension fees, Vidco allowed its purchase option to expire, and shortly afterwards Kennedy and Stockbridge sold the eight holes parcel to the debtor for 680,000.00. (Steingold/Jerbam Exhibit H).
In summary, the debtor Seven Springs claims to hold fee simple title to the property in question, subject only to a real estate tax lien, a deed of trust to Hodor and Pollack,4 and a deed of trust to Patsy (Mrs. Andrew) Kole.5 Steingold, supposedly on behalf of Vidco and all its creditors, asserts that Vidco holds an equitable mortgage interest in the eight holes parcel, which encumbers Seven Springs' title. He also maintains that Seven Springs is the alter ego of Vidco.6
SEVEN SPRINGS.
Debtor's position has two main points. First, debtor holds fee simple title deed to the eight holes, and there are no written instruments which cloud that title. The eight holes is one parcel out of the original 464 acre tract purchased by Hodges Trust. The Hodges Trust conveyed the eight holes to Kennedy and Stockbridge in fee simple, and there is no written evidence that the conveyance from the Hodges Trust to Kennedy and Stockbridge was anything other than that shown on the face of the deed. Quite simply debtor maintains Vidco never owned the eight holes parcel and therefore cannot be an equitable mortgagor of the property.
Debtor's other point involves an examination of defendant Steingold's motives. Debtor believes that Steingold seeks additional collateral for the loans made to Vidco. In attempting to link Seven Springs to Vidco, Steingold looks to the court to correct his earlier poor business judgement and reward his inflexibility in dealing with both debtors, Vidco and Seven Springs.
STEINGOLD.
The fundamental position asserted in Steingold's counterclaim is that the apparent fee simple deed of the eight holes parcel from Hodges Trust to Kennedy and Stockbridge actually created an equitable mortgage between Vidco as mortgagor and Kennedy and Stockbridge as mortgagee. This position maintains that Kennedy and Stockbridge effectively loaned the purchase price to Vidco. Of course, in a typical transaction Vidco would have taken title directly and conveyed a deed of trust to the benefit of Kennedy and Stockbridge as security for the loan. This transaction was structured as a direct sale so that Kennedy and Stockbridge could avoid the expense and delay of foreclosure if Vidco was unable to repay the loan. Thus, according to Steingold, the substance of the Hodges Trust conveyance was that Vidco became the true owner of the eight holes parcel and Kennedy and Stockbridge held only an equitable mortgage on the property. Kennedy and Stockbridge were therefore incapable of transferring more than the rights of their equitable mortgage interest to Seven Springs.
Steingold also asserts that the debtor, having a common ownership with Vidco, is the alter ego of Vidco. If the court accepts Steingold's equitable mortgage and alter ego theories, it follows that the court must treat Seven Springs' bankruptcy as an extension of the Vidco bankruptcy, and therefore the court should: (1) impose a constructive trust on the property on behalf of all creditors of Vidco; (2) allow Steingold to submit a proof of claim in the Seven Springs bankruptcy; and (3) declare the property subject to an equitable easement requiring its permanent usage as part of an eighteen hole golf course.7
Although Maurice Steingold has raised a number of issues in his counterclaim, all of his arguments urgently depend on this court finding that the apparent sale of the eight holes parcel from Hodges Trust to Kennedy and Stockbridge was actually an equitable mortgage from Vidco to Kennedy and Stockbridge. The determination of the various issues raised by Steingold's counterclaim must of course depend largely on Virginia real property law.
In Virginia there is a rebuttable presumption that a deed absolute on its face is presumed absolute unless the party challenging the presumption can prove by clear, unequivocal and convincing evidence that it is something other than what it appears to be. Pretlow v. Hopkins, 182 Va. 826, 30 S.E.2d 557 (1944); Johnson v. Johnson, 183 Va. 892, 33 S.E.2d 784 (1945); Hunter v. Bane, 153 Va. 165, 149 S.E. 467 (1929). Consequently, in this case Steingold has a rather heavy burden to prove Seven Springs does not hold fee simple title to the eight holes parcel.
An equitable mortgage is defined as a transaction which creates a security, irrespective of form or name. Thus, in the classic situation, an instrument which is in the form of a regular fee simple deed of real property, may actually be a mortgage between the parties and subject to the law of mortgages. Even though the instrument appears to convey fee simple title, the grantee actually only takes a mortgagee's interest, and when the grantor repays the underlying debt the grantee must reconvey the property to the grantor. J.W. Pierson Co. v. Freeman, 113 N.J.Eq. 268, 166 A. 121, 122 (1933).
Steingold's argument here presents a variation of the classic equitable mortgage. He argues that the purchase price paid by Kennedy and Stockbridge to Hodges Trust was actually a loan to Vidco which effectively enabled Vidco to purchase the realty. Thus, he urges the court to find that when Seven Springs took title from Kennedy and Stockbridge that title was still encumbered by Vidco's equitable rights to reacquire the property under mortgage law.
The first and foremost factor to be considered in determining whether a conveyance is an equitable mortgage or a deed absolute is the existence of a borrower-lender relationship between the parties. A mortgage occurs when there is some debt between the grantor and the grantee which is secured by the conveyance transaction. Hunter, 149 S.E. at 468; Magee v. Key, 168 Va. 361, 191 S.E. 520 (1937); Eggleston v. Eggleston, ...
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