In re Sheets

• Decision Date: 04 April 2002
• Docket Number: Bankruptcy No. 01-31878-RCM-11.,Adversary No. 01-3620.
• Parties: In re John Nicholas SHEETS, Debtor. Steven S. Turoff, Plaintiff, v. John Nicholas Sheets, Eleanor Mowery-Sheets, Eleanor Mowery-Sheets, Inc., Urban One Holding, L.P., Urban One, Inc., John Christian Mowery, Kathy Hewitt, Paige Compton, Robert Kucharski, Steve Habgood, John Whiteside, Kyle Byrom, NRT Texas, Inc., Countrywide Home Loans, Inc., Internal Revenue Service, Michael Allen Singleton, Dora Jane Flowers, Lorna Jean Singleton, and Lana Lee Dunn, Defendants.
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas

Page 298

277 B.R. 298

In re John Nicholas SHEETS, Debtor Steven S. Turoff, Plaintiff, v. John Nicholas Sheets, Eleanor Mowery-Sheets, Eleanor Mowery-Sheets, Inc., Urban One Holding, L.P., Urban One, Inc., John Christian Mowery, Kathy Hewitt, Paige Compton, Robert Kucharski, Steve Habgood, John Whiteside, Kyle Byrom, NRT Texas, Inc., Countrywide Home Loans, Inc., Internal Revenue Service, Michael Allen Singleton, Dora Jane Flowers, Lorna Jean Singleton, and Lana Lee Dunn, Defendants.

Bankruptcy No. 01-31878-RCM-11.

Adversary No. 01-3620.

United States Bankruptcy Court, N.D. Texas, Dallas Division.

April 4, 2002.

James D. McCarthy, Eric D. Madden, Diamond McCarthy, Dallas, TX, for plaintiff.

Lynn Hamilton Butler, Hance Scarborough, Austin, TX, Robert A. Miller, Prager Metzger, Dallas, TX, Rosa Jean Y. Bryant, Barrett Burke, Houston, TX, Harlin DeWayne Hale, Baker & McKenzie, Dallas, TX, Ramona Stephens Notinger, Department of Justice, Dallas, TX, Robert K. Whitt, Midland, TX, John B. Schorsch, Jr., Mastrogiovanni Schorsch, Martin K. Thomas, Dallas, TX, Gerald K. Fugit, Odessa, TX, for defendants.

MEMORANDUM OPINION

ROBERT C. McGUIRE, Bankruptcy Judge.

On January 23, 2002, came on to be heard Trustee Steven S. Turoff's ("Trustee") Motion for Partial Summary Judgment and Defendants Urban One Holding, L.P., Urban One, Inc., Paige Compton Whiteside, Kathy Hewitt, Robert Kucharski, Steve Habgood, Kyle Byrom, and John Whiteside's (collectively "Urban One Partners") Motion for Summary Judgment. The Court has core jurisdiction over this matter under 28 U.S.C. §§ 1334 and 157(b)(2)(A), (E), (K), and/or (O) (admitted by Urban One Partners). The following are the Court's findings of undisputed facts and conclusions of law under Bankruptcy Rule 7052.

Undisputed Facts

Debtor Sheets ("Sheets") is a real estate broker for Defendant Coldwell Banker Residential Brokerage ("Coldwell Banker"). Sheets filed his Voluntary Petition for Chapter 11 bankruptcy on March 6, 2001.

On June 25, 1999, Sheets entered into a Contract for Deed¹ with Defendant Urban One Holding, L.P. for the sale of certain real property located on Harwood Street in Dallas, Texas (the "Harwood Property"). (Trustee's App. Tab 9 Exhibit ("Ex.") 16.); (Urban One Partners' App. at pp. 10-18.) On that date, Urban One Holding, L.P. was owned by the following entities/individuals in the stated percentages:

1. Urban One, Inc. — 50%

2. Kathy Hewitt — 5.555%

3. Paige Compton — 11.111%

4. Robert Kucharski — 5.555%

5. Steve Habgood — 5.555%

6. John Whiteside — 11.111%

7. Kyle Byrom — 5.555%

8. Christian Mowery — 5.555%

(Trustee's App. Tab 9 Ex. 10.)

Urban One, Inc. is the general partner of Urban One Holding, L.P. (Id.) Urban One, Inc. was registered with the Texas Secretary of State on May 27, 1999. (Trustee's App. Tab 9.); (Urban One Partners' App. at p. 6.) On May 27, 1999, the record reflects that Sheets was the 100% shareholder of Urban One, Inc. (Trustee's App. Tab 9 Ex. 24.)

On June 28, 1999, Sheets purchased the Harwood Property from Thad Baker ("Baker"). (Urban One App. at pp. 19-23.) The Warranty Deed transferring ownership of the property carried with it a first lien in favor of AMRESCO Residential Mortgage Corporation ("AMRESCO") and Baker in the amount of $273,750.00 and a second lien in favor of Baker in the amount of $40,000. (Id.)

The first lien with AMRESCO was secured by a Note and a Deed of Trust. The relevant portions of the Deed of Trust read as follows:

BORROWER COVENANTS that Borrower is lawfully seised of the estate hereby conveyed and has the right to grant and convey the Property and that the Property is unencumbered, except for encumbrances of record. Borrower warrants and will defend generally the title to the Property against all claims and demands, subject to any encumbrances of record.

* * *

17. Transfer of the Property or a Beneficial Interest in Borrower. If all or any part of the Property or any interest is sold or transferred ... without Lender's prior written consent, Lender may, at its option, require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if exercise is prohibited by federal law as of the date of this Security Instrument.

If Lender exercises this option, Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less than 30 days from the date the notice is delivered or mailed within which Borrower must pay all sums secured by this Security Instrument. If Borrower fails to pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security Instrument without further notice or demand on Borrower.

(Trustee's App. Tab 9 Ex. 21; Urban One Partners App. at pp. 24, 27.)

In turn, Coldwell Banker leased the Harwood Property from Urban One Holding, L.P. on July 1, 1999. (Urban One Partners App. at pp. 41-65.) The rent was in an amount equal to the mortgage on the Harwood Property. Urban One Holding, L.P. represented and warranted that "it has good and marketable fee title" to the Harwood Property. (Urban One Partners App. at p. 46.)

Christian Mowery, Sheets's stepson, later assigned his interest in Urban One Holding, L.P. to the other limited partners. (Trustee's App. Tab 9 Ex. 3.) Also, the remaining limited partners purchased the outstanding shares (10,000 shares of common stock) of Urban One, Inc. from Eleanor Mowery Sheets, Sheets's wife.² (Trustee's App. Tab 9 Ex. 4.) Although the Stock Purchase Agreement and the Assignment of Limited Partnership Interest state that they are "[e]ffective January 1, 2000," Defendants Paige Whiteside and Kathy Hewitt did not execute the assignment and stock purchase agreement until April, 2001, more than one month after Sheets filed his Voluntary Petition. (Trustee's App. Tab 9 Exs. 3, 4.)

Defendant Kathy Hewitt ultimately paid off the Baker Note, in the amount of $40,000 plus interest, on or about January 11, 2000. (Trustee's App. Tab 7 Ex. 34.) In a letter agreement, Sheets agreed to either assign a respective percentage of his ownership "in Urban One Holding, L.P.," or to repay Hewitt by March 12, 2000. (Id.) It is unclear from the record whether he repaid Hewitt; however, the April, 2001 Assignment of Limited Partnership reflects that Hewitt only owned 20% of Urban One, L.P. after Christian Mowery's assignment and the remaining partners' alleged purchase of the outstanding shares in Urban One, Inc. (Trustee's App. Tab 9 Ex. 3.)

Summary of the Motions

The Trustee seeks partial summary judgment pursuant to § 544(a)(3) avoiding any interest in the Harwood Property claimed by Urban One Partners. Urban One Partners seeks summary judgment on the grounds that the Trustee must either assume or reject the contract for deed under § 365(i)³, but cannot avoid Urban One Partners' interest in the Harwood Property.

Summary Judgment Standard

Rule 7056 of the Bankruptcy Rules provides that summary judgment is appropriate if there is no genuine dispute over any material facts. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585-86, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Fed.R.Civ.P. 56.

The summary judgment procedure is "an integral part of the federal rules as a whole, which [is] designed to `secure the just, speedy and inexpensive determination of every action.'" Celotex Corp., 477 U.S. at 327, 106 S.Ct. 2548 (citing Fed.R.Civ.P. 1). Under Rule 56(c), brought forward in Bankruptcy Rule 7056(c), summary judgment is proper when the record establishes that no genuine issue as to any material fact exists, and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The substantive law will identify what facts are material. Anderson, 477 U.S. at 248, 106 S.Ct. 2505; FDIC v. SW Motor Coach Corp., 780 F.Supp. 421, 422 (N.D.Tex.1991).

A dispute is genuine only if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson, 477 U.S. at 249, 106 S.Ct. 2505; Calpetco 1981 v. Marshall Exploration, Inc., 989 F.2d 1408, 1413 (5th Cir.1993) ("mere disagreement" between parties is not enough to create genuine dispute). "Stated another way, `if the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial.'" Epps v. NCNB Texas Nat'l Bank, 838 F.Supp. 296, 299 (N.D.Tex.1993) (quoting Friou v. Phillips Petroleum Co., 948 F.2d 972, 974 (5th Cir.1991)). However, all of the evidence must be viewed in the light most favorable to the motion's opponent. Gremillion v. Gulf Coast Catering Co., 904 F.2d 290, 292 (5th Cir.1990).

Once the movant has made a proper motion, the burden shifts to the non-moving party to establish the existence of a genuine issue for trial. Celotex, 477 U.S. at 323-24, 106 S.Ct. 2548; Matsushita Elec. Indus. Co., 475 U.S. at 585-86, 106 S.Ct. 1348. The non-movant must raise more than a mere scintilla of evidence, and he "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co., 475 U.S. at 586, 106 S.Ct. 1348.

Section 544, Section 365 and the Contract for Deed

Section 544(a) gives either the trustee or the debtor in possession the rights or powers of certain hypothetical entities as of the petition date, without regard to any knowledge of such trustee or of any creditor.⁴

Section 365, on the other hand, provides that the trustee, subject to court approval, may assume or reject any executory contract of the debtor. A contract for deed is an executory contract subject to the provisions of § 365. In re Von Keisler, 166 B.R. 620 (Bankr.N.D.Tex.1994); In re Waldron, 65 B.R. 169 (Bankr.N.D.Tex.1986); In re Finley, 138 B.R. 181 (B...