In re Two Springs Membership Club, Bankruptcy No. 04-44837.

• Decision Date: 09 April 2009
• Docket Number: Adversary No. 06-4112.,Bankruptcy No. 04-44837.
• Citation: 408 B.R. 453
• Parties: In re TWO SPRINGS MEMBERSHIP CLUB, Debtor. Elaine B. Greaves, Trustee, Plaintiff, v. Office of the Delaware Attorney General, et al., Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Ohio

408 B.R. 453

In re TWO SPRINGS MEMBERSHIP CLUB, Debtor Elaine B. Greaves, Trustee, Plaintiff, v. Office of the Delaware Attorney General, et al., Defendants.

Bankruptcy No. 04-44837.

Adversary No. 06-4112.

United States Bankruptcy Court, N.D. Ohio, Eastern Division.

April 9, 2009.

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Andrew W. Suhar, Suhar & Macejko, LLC, Youngstown, OH, for Plaintiff.

Douglas Snoeyenbos, U.S. Justice Dept, Washington, D.C., Martha E. Romero, Whittier, CA, for Defendant.

MEMORANDUM OPINION REGARDING TRIAL

KAY WOODS, Bankruptcy Judge.

Debtor Two Springs Membership Club ("Debtor") filed a voluntary petition pursuant to chapter 11 of Title 11 on October 4, 2004, which was converted to a case under chapter 7 on June 30, 2005. Elaine Greaves ("Trustee") was appointed chapter 7 trustee in Debtor's case.

Debtor's assets consisted of: (i) certain real estate at 14200 Indian Avenue, North Palm Springs, California, upon which a campground for recreational vehicles was operated ("Campground") and (ii) certain personal property located thereat. On September 6, 2006, Trustee filed Motion to Sell Property by Private Sale Free and Clear of All Liens, Encumbrances and Other Interests ("Motion to Sell") (Main Case Doc. # 64), which sought authority to sell the Campground. Michael D. Buzulencia ("Revcon Trustee"), chapter 7 trustee for Revcon Motorcoach, Inc., a Nevada corporation ("Revcon Nevada"), Case No. 04-44836,¹ filed Limited Objection to Sale (Main Case Doc. # 70) on September 21, 2005. The Limited Objection asserted that the Campground might be an asset of Revcon Nevada because the Revcon Trustee understood that Revcon Nevada "fraudulently transferred the real estate it owns to [Debtor] which is being sold by [Debtor's] trustee[.]"

On October 24, 2005, this Court entered Order Authorizing Sale of Property Free and Clear of All Liens, Encumbrances, Claims and Other Interests ("Sale Order") (Main Case Doc. # 75), which authorized the sale of the Campground. Trustee sold the Campground for $2,610,000.00 ("Sale Proceeds") from which she was authorized to: (i) pay closing costs; (ii) pay accrued and delinquent real estate taxes; (iii) pay the balance of the mortgage, not to exceed $1,300,000.00; (iv) hold in escrow $33,000.00 to resolve the Revcon Trustee's Limited Objection; and (v) pay estimated administrative tax expenses in the aggregate amount of $500,000.00. All other liens, claims and encumbrances attached to the Sales Proceeds in the order of their priority and with the same validity and effect that they had against the Campground. The Sale Order also directed Trustee to commence an adversary proceeding to determine the extent of all liens, claims and encumbrances against the Campground.

On June 1, 2006, Trustee commenced the instant adversary proceeding, seeking a determination of the validity, priority and extent of all liens against the Campground. Twenty defendants were named and served in the Adversary Proceeding. On June 27, 2006, the United States of America, on behalf of the Internal Revenue Service ("Government"), filed United States' Answer ("Government Answer") (Adv. Proc. Doc. # 8). On July 20, 2006, Camp Coast to Coast, Inc. and the Affinity Group, Inc. (collectively, "Coast") filed Answer, Counterclaim and Crossclaim of Camp Coast to Coast, Inc. and Affinity Group, Inc. ("Coast Answer") (Adv. Proc. Doc. # 15). On April 2, 2008, the County of Riverside and County of Riverside Treasurer (not a separate entity), California ("Riverside County") filed Answer to Complaint to Determine Validity, Priority and Extent of Liens and Determination of Income [sic] Liability by Secured Creditor County of Riverside and Riverside County Treasurer, California (Adv. Proc. Doc. # 52). Riverside County filed Motion to Deem Answer to Plaintiff's Complaint Timely Filed Filed [sic] by Secured Creditor County of Riverside and Riverside County Treasurer, California (Unopposed by Trustee) (Adv. Proc. Doc. # 124) on November 14, 2008. The Court entered Order on Motion to Deem Answer to Plaintiff's Complaint Timely Filed by Secured Creditor County of Riverside and Riverside County Treasurer, California (Adv. Proc. Doc. # 139) on December 3, 2008. All other defendants failed to answer or otherwise respond to the Complaint. Trustee obtained default judgments against all other defendants, with the exception of Revcon Nevada.²

On October 6, 2006, the Court entered Order (Main Case Doc. # 92), which provided for "full settlement of [the Revcon Trustee's] claim to the [S]ale [P]roceeds" in consideration of payment by Trustee of $33,000.00.³ (Order at 2.)

Trustee settled the claim of Riverside County, and the Court entered Judgment Order With Regard to Riverside County, California/Riverside County Treasurer ("Judgment Order") (Adv. Proc. Doc. # 118) on November 7, 2008. The Judgment Order provided that: (i) real estate taxes on the Campground owing by Debtor to Riverside County are the first and best lien on the Sale Proceeds; (ii) the undisputed amount of such real estate taxes is $303,191.70 ("Tax Amount"); (iii) Trustee will immediately pay Riverside the Tax Amount; and (iv) Trustee will retain $13,291.21 in a separate account until further order of the Court.⁴

After settling with the Revcon Trustee and Riverside County, the only defendants remaining in this Adversary Proceeding are the Government and Coast. Coast asserted a counterclaim against Trustee, alleging that, on October 15, 2001, it had filed a judgment lien with the Superior Court of Orange County, California, against Revcon Nevada, dba Debtor, in the amount of $3,880,038.54 ("Judgment Lien") and that such Judgment Lien is a "valid and subsisting lien" upon the Sale Proceeds. (Coast Answer ¶ 12.) Coast also asserted a crossclaim against Revcon Nevada,⁵ arguing that Debtor and Revcon Nevada "conducted operations in such a fashion that they disregarded the valid business interest of the other in making decisions with respect to each of the entities[,]" and, thus, "each debtors' [sic] assets and each debtors' [sic] liabilities ... [are] the assets and liabilities of the other." (Id. ¶¶ 18-19.) The Government asserted "its interest in the [Sale P]roceeds based on federal tax liens associated with unpaid federal tax assessments originally made in the names of All Seasons Resorts, Inc., Travel America, Inc., Revcon Motorcoach, Inc. and Two Springs Membership Club, as set forth in the United States proof of claim, filed ... on January 11, 2005." (Gov't Answer ¶ 6.)

Coast and the Government each insist that it has the first and best lien against the Sale Proceeds (after the Tax Amount)⁶ Neither Coast nor the Government has a direct lien against Debtor's interest in the Campground. Both parties rely on the theory of alter ego in order to assert the priority of their liens.

Prior to trial, the Court ruled on cross motions for summary judgment filed by the Government and Coast and a second motion for summary judgment filed by the Government.

The Court scheduled trial to begin on February 23, 2009, at which the only testimony presented by the parties were jointly designated portions of deposition transcripts of Raymond Novelli, dated October 10, 2007, and Marlies Novelli, dated September 5, 2007.⁷ The following documents were admitted as exhibits: Exhibits 1-3, 6-10, 16, 17, 19, 20, 25-28, 30, 31, 40, 41, 43, 44, 50-55, 59-61, 65 (but only to the extent the deposition of Marlies Novelli contained testimony about each memorandum contained in Exhibit 65), 67, and 75-78. The Court sustained Coast's objection to the admission of Exhibits 5, 45, 46, 56, 62, 71-73, 79, and 80. Exhibit 64 was withdrawn by the Government. The parties identified the following issues to be determined at trial:

1. Are Revcon Nevada and Debtor alter egos of each other? If so, is Coast's judgment against Revcon Nevada a lien against the Sale Proceeds? If so, when did the lien arise?

2. Are Revcon Nevada and one or more of (i) Travel America,⁸ (ii) Revcon California, and/or (iii) All Seasons, as well as Revcon Nevada and Debtor, alter egos of each other?⁹ If so, are the tax liens asserted by the Government against such entities liens against the Sale Proceeds?

This Court has jurisdiction pursuant to 28 U.S.C. § 1334 and the general order of reference (General Order No. 84) entered in this district pursuant to 28 U.S.C. § 157(a). Venue in this Court is proper pursuant to 28 U.S.C. §§ 1408 and 1409. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (K) and (O). The following constitutes the Court's findings of fact and conclusions of law pursuant to FED. R. BANKR.P. 7052.

I. FACTUAL AND PROCEDURAL BACKGROUND¹⁰

Debtor is one of several campgrounds owned and/or operated by Raymond Novelli ("Novelli") and various associates (collectively, "Novelli Group"). Debtor filed a chapter 11 voluntary petition in this Court on October 4, 2004 (Case No. 04-44837) ("Debtor's Case"). Revcon Nevada, another Novelli Group entity, also filed a chapter 11 voluntary petition in this Court on October 4, 2004 (Case No. 04-44836) ("Revcon Nevada Case"). Each of these cases was converted to chapter 7 on June 30, 2005.

Debtor did not list Coast as a creditor in its voluntary petition. Revcon Nevada listed Coast as its largest creditor, with an unsecured claim of $3,880,038.54.¹¹ The Court entered Notices of Need to File Proof of Claim Due to Recovery of Assets in (i) Debtor's Case, and (ii) the Revcon Nevada Case, setting the last date to file claims in each case. The claims deadline for the Revcon Nevada Case was December 28, 2005 (Revcon Nevada Case Doc. # 43). The claims deadline for Debtor's Case was November 9, 2005 (Debtor's Case Doc. # 61). Coast filed claims for $3,880,038.54 in (i) the Revcon Nevada Case (Revcon Nevada Case Claim No. 3) on April 17, 2007, and (ii) Debtor's Case (Debtor's Case Claim No. 10) on April 18, 2007. The Revcon Trustee filed Trust...