In re Square At Falling Run, LLC

• Decision Date: 30 April 2012
• Docket Number: No. 11–bk–753.,11–bk–753.
• Citation: 472 B.R. 337
• Court: U.S. Bankruptcy Court — Northern District of West Virginia
• Parties: In re The SQUARE AT FALLING RUN, LLC, Debtor.

472 B.R. 337

In re The SQUARE AT FALLING RUN, LLC, Debtor.

No. 11–bk–753.

United States Bankruptcy Court,

N.D. West Virginia.

April 30, 2012.

Edward R. Kohout, Law Office of Edward R. Kohout, Morgantown, WV, for Debtor.

United States Trustee, Charleston, WV.

Robert L. Johns, Charleston, WV, Trustee.

MEMORANDUM OPINION

PATRICK M. FLATLEY, Bankruptcy Judge.

First United Bank & Trust (“First United”) seeks entry of an involuntary order for relief against The Square at Falling Run, LLC (“The Square”), under Chapter 7 of the Bankruptcy Code.¹ The Square contends that, among other things, First United filed the involuntary petition in bad faith and that this is only a two-party dispute such that an involuntary order for relief should not be entered.

Based upon the evidence and arguments presented by the parties, the court finds that First United has established grounds for relief under 11 U.S.C. § 303; accordingly, an order for relief will be entered.²

I. BACKGROUND

On December 19, 2008, several entities controlled by common principals borrowed $2.48 million from First United on a non-revolving line of credit. The Square, which also shares principals common to the Borrowing Entities, ³ guaranteed the Borrowing Entities' indebtedness to First United. By signing the December 19, 2008 Commercial Guaranty (the “Guaranty”), The Square obligated itself to the performance and prompt payment, upon request, of all indebtedness when due, whether at maturity or earlier. To secure The Square's performance of the Guaranty, First United took a credit line leasehold deed of trust on The Square's leasehold interest in the April 17, 2008 Ground Lease (the “Ground Lease”) executed by the City of Morgantown Building Commission (the “City”), as lessor, and The Square and McCoy 6 Apartments, Limited Liability Company (“McCoy 6”), as lessees. The Ground Lease required, in part, that The Square and McCoy 6 build a parking structure on the leased property by April 1, 2011.

The Borrowing Entities defaulted on the note owed to First United. Subsequently, First United filed a complaint against The Square in the District Court for the Northern District of West Virginia (Case No. 1:11–cv–31) on March 18, 2011, alleging The Square's default on the December 19, 2008 loan agreement and Guaranty, demanding damages flowing from the default, and seeking the appointment of a receiver to take control of The Square's assets and operations.⁴ While the district court litigation was proceeding, however, the City sent all interested parties notice of its intent to terminate the lease with The Square based on The Square's failure to complete the contemplated parking structure on the leased property by the April 1, 2011 deadline. First United's receipt of the City's notice of termination precipitated its decision to file this involuntary petition against The Square. ⁵

II. DISCUSSION

First United asserts that the court should enter an involuntary order for relief against The Square because (1) it holds a non-contingent claim of $2.48 million that is not the subject of a bona fide dispute as to liability or amount; (2) its claim is at least $14,425.00 more than the value of any lien on The Square's property securing its claim; (3) The Square has fewer than 12 creditors; ⁶ and (4) The Square is generally not paying its debts as they become due.

The Square asserts that First United's claim is contingent and is the subject of a bona fide dispute, First United is its only creditor causing this case to be only a two-party dispute, and First United filed the involuntary petition in bad faith.

1. Not Contingent as to Liability

Without directing the court to any specific language in the Guaranty—in fact, the court finds none—The Square asserts that First United's claim is contingent and the subject of a bona fide dispute on the grounds that the December 19, 2008 Guaranty was contingent upon the building of a parking facility on the property leased from the City. The Square further asserts that, pursuant to the terms of its lease with the City, its leasehold interest in the property upon which the parking facility was to be built could not be encumbered except for the purpose of building the parking facility. Thus, The Square asserts that because the loan it guaranteed was a “workout loan,” which was not made for the construction of a parking facility, First United's secured interest in the leasehold property is subject to bona fide dispute.

The initial burden rests on the petitioning creditors to establish a prima facie case that their claims are not contingent and that no bona fide dispute exists regarding such claims. In re Tucker, No. 5:09–bk–914, 2010 WL 4823917, at *3 (Bankr.N.D.W.Va. Nov. 22, 2010) (citing Platinum Fin. Servs. Corp. v. Byrd (In re Byrd), 357 F.3d 433, 437 (4th Cir.2004)). Once the prima facie case is established, the burden then shifts to the debtor to show that the claims are contingent or that a bona fide dispute exists. Tucker, 2010 WL 4823917, at *3.

Section 303(b) of the Bankruptcy Code (the “Code”) authorizes the filing of an involuntary Chapter 7 petition by creditors who meet certain qualifications. To file an involuntary petition against a putative debtor, a creditor must hold a claim that is not “contingent as to liability or the subject of a bona fide dispute as to liability or amount.” 11 U.S.C. § 303(b)(1).

The first creditor qualification criterion—not contingent as to liability—is defined by case law. The following formulation is widely accepted as the standard used for determining whether a claim is contingent under § 303(b):

[C]laims are contingent as to liability if the debt is one which the debtor will be called upon to pay only upon the occurrence or happening of an extrinsic event which will trigger the liability of the debtor to the alleged creditor and if such triggering event or occurrence was one reasonably contemplated by the debtor at the time the event giving rise to the claim occurred.

In re All Media Properties, Inc., 5 B.R. 126, 133 (Bankr.S.D.Tex.1980); see e.g., Holland v. DePaulis (In re DePaulis), No. 3:07cv75, 2008 WL 4446999, at *6, 2008 U.S. Dist. LEXIS 74396, at *16–17 (W.D.N.C. Sept. 26, 2008); Brockenbrough v. Commissioner, IRS, 61 B.R. 685, 686 (W.D.Va.1986); In re Local Communs. Network, Inc., No. 07–12433, 2008 WL 52865, at *2–3, 2008 Bankr.LEXIS 14, at *8 (Bankr.E.D.Va. Jan. 2, 2008); In re Gills Creek Parkway Assocs., L.P., 194 B.R. 59, 62 (Bankr.D.S.C.1995); In re Galaxy Boat Mfg. Co., 72 B.R. 200, 203 (Bankr.D.S.C.1986).

When a petitioning creditor's claim is based upon a putative debtor's guaranty of a primary obligor's performance and payment, the court focuses on whether the guaranty is absolute. See38A C.J.S. Guaranty § 79 (2011) (“In general, in the absence of an express provision, the duty of the guarantee to notify the guarantor of a default depends on whether [ ] the guaranty is absolute.”). “A guaranty is deemed to be absolute unless its terms import some condition precedent to the liability of the guarantor.” Esso Standard Oil Co. v. Kelly, 145 W.Va. 43, 48, 112 S.E.2d 461, 465 (W.Va.1960). But if a guaranty imposes some affirmative duty upon a petitioning creditor to provide a guarantor with notice of default or demand for payment, the court then focuses on whether such affirmative action was taken. See In re Vitro Asset Corp., et al., No. 11–32600–hdh–11, 2011 WL 1561025, at *3 (Bankr.N.D.Tex. April 21, 2011) (“Because the indentures require a demand on the guarantors and no such demand had been made when the involuntary petitions were filed, ... the guarantors' obligations were contingent as to liability.”).

Here, the following provision contained in the Guaranty evidences that The Square is not an absolute guarantor in that its duty to perform arises only after request or demand by First United: “If Borrower fails to perform or observe any covenants, conditions and agreements required of Borrower ... the Guarantors shall, upon request of Lender, perform such covenant, condition or agreement, including but not limited to prompt payment of the Indebtedness....” Pl.'s Exhibit 7, page 4 (emphasis added). Thus, request or demand for payment is a condition of The Square's liability on the Guaranty. The Square has no duty to act under the terms of the Guaranty until First United requests or demands payment.

The court finds, however, that The Square received the required notice of default and demand for payment from First United upon the filing of the three-count, March 18, 2011 complaint in the district court (Doc. No. 3 in Case No. 1:11–cv–31), which occurred before First United filed this involuntary petition against The Square. As Beverly Sines, Chief Credit Officer at First United, testified, First United brought its district court action against The Square because the Borrowing Entities defaulted on the December 19, 2008 loan, and First United wanted to demand payment from The Square as Guarantor. First United's filed complaint specifically alleges default under the Borrowing Entities' loan agreement and The Square's leasehold deed of trust, and demands judgment against The Square as guarantor in the principal amount of $1,502,087.11.⁷ Thus, Count I of the complaintalleging default under the December 19, 2008 loan and demanding payment is a sufficient demand for payment under the Guaranty to make First United's claim noncontingent. See Cedarbrook Plaza, Inc. v. Gottfried, Civil Action No. 97–1560, 1997 WL 330390, at *4–5, 1997 U.S. Dist. LEXIS 8026, at *13 (E.D.Pa. June 4, 1997) (considering the filing of a complaint a demand for payment on a guaranty where the guaranty was silent as to how demand was to be made).

To the extent that The Square also asserts that First United's claim against it as Guarantor is contingent because its obligation to guaranty the indebtedness to First United was contingent upon the building of a parking structure, the purpose of the Guaranty...