In re Wellington Apartment, LLC
| Decision Date | 24 August 2006 |
| Docket Number | Bankruptcy No. 04-50301-DHA.,Adversary No. 05-5029. |
| Citation | 350 B.R. 213 |
| Court | U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | In re WELLINGTON APARTMENT, LLC, Debtor. Wellington Apartment, LLC, Plaintiff, v. Charles H. Clotworthy, et al., Defendants. |
John M. Ryan, Jr., Karen M. Crowley, Marcus, Santoro & Kozak, P.C., Chesapeake, VA, for Plaintiff.
Michael L. Donner, Sr., Weinberg & Stein, R. Clinton Stackhouse, Jr., Stackhouse, Nexsen & Turrietta, Douglas M. Foley, McGuireWoods LLP, Peter G. Zemanian, Zemanian Law Group, Norfolk, VA, Benjamin C. Ackerly, Jason William Harbour, Hunton & Williams LLP, Richmond, VA, for Defendants.
AMENDED MEMORANDUM ONION AND ORDER
This matter is before the Court on the Complaint of Wellington Apartment, LLC ("Wellington," "Plaintiff" or "Debtor") against Charles H. Clotworthy, III ("Clotworthy"), Richard Merel ("Merel"), Steven Byers ("Byers"), Garfield & Merel, Ltd. ("G & M"), WP New Orleans, L.L.C. ("WP New Orleans"), and WPN, L.L.C. ("WPN"),1 (collectively referred to as'"the defendants"). The facts and issues involved in this matter are extremely complicated because of the parties' actions. While the complaint alleges eleven causes of action against the defendants, they all boil down to one ultimate question: did the defendants deprive the debtor of $1,615,000 in assets by fraudulently eliminating the debtor's interest in real property located in New Orleans, Louisiana? After making our way through the labyrinth of facts in this case, this Court makes the following Findings of Fact and Conclusions of Law.
This is a core proceeding over which this Court has jurisdiction under 28 U.S.C. §§ 157(b)(2) and 1334(b). Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409.
This case is very fact specific and, unfortunately, as stated above, the underlying facts are quite convoluted; the Court has attempted to organize them in the most efficient manner possible.
To begin the confusion in this case, there are two different Wellington entities, Wellington Apartments, LLC, organized in Connecticut ("Wellington CT") and Wellington Apartment, LLC, organized in Virginia ("Wellington VA"). The only difference in the names of the entities is the "s" at the end of the word "Apartment" in the Connecticut company. Wellington CT is owned equally by Hamilton Apartments, LLC and AR Investments, LLC.2 Wellington VA is owned equally by N.I. USA, LLC and Woodland Holding, LLC. N.I. USA, LLC is owned by Ran Nizan ("Nizan") and his wife and. Woodland Holding, LLC is owned by Nizan's father and his father's business partner. Nizan is the manager of both Wellington entities and both share Nizan's home address in Danbury, Connecticut. (Tr. 77).
On November 13, 2002, Wellington CT filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the District of Connecticut, Bridgeport Division. The case was converted to one under Chapter 7 of the Code with Wellington CT's consent on January 23, 2003,3 and was transferred to the Eastern District of Virginia, Newport News Division on December 10, 2004, at the request of First Bank & Trust Company of Illinois ("First Bank"), an alleged creditor in that case. The term "alleged" is used because there was a dispute over the enforceability of the note payable to First Bank, as well as questions regarding the ownership of the property pledged as collateral for the loan; Wellington CT's schedules state that the signature on the note is a forgery. It appears, however, that these issues have been resolved in the litigation described below between First Bank and Wellington VA.
On January 5, 2004, Wellington VA also filed for relief under Chapter 11 of the Code in the District of Connecticut, Bridgeport Division, and its case was transferred to the Eastern District of Virginia, Newport News Division, on February 3, 2004.4 The only asset of Wellington VA was a 152-unit apartment complex located in Newport News, Virginia.
On May 12, 2004, First Bank & Trust Company of Illinois filed an adversary proceeding against Wellington VA for payment of a note allegedly secured by a Second Deed of Trust against the debtor's apartment complex.5 The debtor argued that the signature on the Second Deed of Trust was a forgery and that it did not owe any money to First Bank based on that document.6
On June 1, 2005, the debtor filed the instant Complaint against the defendants based on their allegedly fraudulent conduct surrounding the placement of First Bank's Second Deed of Trust on the debtor's apartment complex. On July 22, 2005, the defendants filed a Motion to Dismiss Counts I, II, IV, V, VI, VII, VIII and IX of the Complaint, which Motion they withdrew in open court on September 21, 2005. The defendants eventually answered the Complaint on October 4, 2005.
On July 14, 2005, the instant adversary proceeding, the adversary proceeding filed by First Bank against the debtor and an Objection to Claim of First Bank filed by the debtor were procedurally consolidated. by Order of the Court.
While the attorneys for both sides have managed this case and their clients with the utmost professionalism, the parties themselves have been uncooperative with each other. The discovery motions began on October 27, 2005, when the debtor filed its first Motion to Compel against Merel, Clotworthy, WPN and G & M; the next day the defendants filed a Motion to Sever this adversary proceeding from the other litigation listed above and stay the discovery, or in the alternative for the Court to issue a protective order to protect certain information, and an objection to the discovery propounded by the debtor. The debtor objected to the Motion to Sever and after a hearing on November 15, 2005, the Court denied the Motion and ordered the defendants to answer the discovery requests of the debtor.
On December 16, 2005, the debtor filed a Motion for Sanctions against Merel, Clotworthy, WPN and G & M, and after a hearing held on January 3, 2006, the Court declared WPN to be in default for failing to answer discovery and ordered Clotworthy, Merel and G & M to fully and completely answer interrogatories propounded by the debtor and produce all requested documents. The debtor then filed a Motion to Approve Entry of an Order Establishing Certain Facts as to WPN in light of its default. That motion was not decided because prior to a ruling, WPN requested that the Court reconsider its ruling regarding WPN's default. The Court granted the reconsideration motion, but refrained from issuing a second ruling on WPN's default, and instead took the matter under advisement. Given the ruling found in this Memorandum Opinion and Order, the debtor's Motion to establish certain facts as to WPN is moot and a hearing on the issue of sanctions against the defendants will be scheduled pursuant to the Court's order entered February 17, 2006.
On February 7, 2006, the debtor filed a second Motion for Sanctions against Merel and G & M for failing to timely respond to discovery, and then providing unsworn answers to Interrogatories and providing minimally responsive documents to a Request for Production of Documents more than two weeks after the deadline to respond. That same day the defendants filed a Motion for Summary Judgment or in the Alternative, Partial Summary Judgment, based on several equitable defenses. A week later the defendants filed their own Motion to Compel, asking that Nizan be forced to turn over copies of his tax returns for the years 2000-2004, to which debtor's counsel responded that she could only ask Nizan to turn over his tax records, but that she could not force him to do so as Nizan is not the debtor. The Court agreed with the debtor, but stated that the defendants would have the opportunity to ask Nizan about his tax records when he appeared at the trial. As for the Motion for Summary Judgment, the Court heard arguments on March 1, 2006, and denied such relief as to all counts except those involving legal malpractice and breach of fiduciary duties by Merel and G & which the Court took under advisement. The Court advised that the defendants could renew their summary judgment motion at trial.
Prior to trial, the debtor and First Bank miraculously settled their dispute, which resulted in Wellington VA paying First Bank $2,300,000. This settlement meant that the trial would deal only with the Complaint in the instant adversary proceeding.
Finally, the trial was held over five days, March 1, 2, 3, 6, and 8, 2006. After the plaintiff debtor rested its case, the defendants moved for Judgment on Partial Findings pursuant to rule 52(c) of the Federal Rules of Civil Procedure as incorporated into Bankruptcy Rule of Civil Procedure 7052(c). The defendants argued they were entitled to such relief for two reasons: 1) this action is basically an indemnification proceeding and the debtor failed to prove actual or potential liability on First Bank's claim and did not show that the settlement was reasonable, and 2) that the debtor failed to meet its burden of proof on the legal malpractice and breach of fiduciary duty claims for several reasons, including the fact that the debtor did not call an expert witness to opine on Illinois law; it failed to prove an on-going attorney client relationship between the debtor and Merel/G & M; and it did not prove that Merel/G & M were informed that the services were being provided for the benefit of a third party. The debtor responded that the action is not one of indemnification, but rather one of lost equity to the debtor and that no expert was needed as both Merel and G & M failed to meet the minimum standards set forth in the Illinois Code of Professional Responsibility.
The Court overruled the defendants' Motion...
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