Int'l Bank of Commerce v. Davis (In re VP)

• Decision Date: 06 March 2014
• Docket Number: Bankruptcy No. 12–10175.,Adversary No. 12–01006.
• Citation: 506 B.R. 701
• Parties: In re DIAMOND BEACH VP, LP, Debtor(s). International Bank of Commerce, Plaintiff(s) v. Randall J. Davis, et al., Defendant(s).
• Court: U.S. Bankruptcy Court — Southern District of Texas

506 B.R. 701

In re DIAMOND BEACH VP, LP, Debtor(s).International Bank of Commerce, Plaintiff(s)

v.Randall J. Davis, et al., Defendant(s).

Bankruptcy No. 12–10175.

Adversary No. 12–01006.

United States Bankruptcy Court,

S.D. Texas,

Brownsville Division.

Signed March 6, 2014.

Whitney V. Ables, John F. Higgins, IV, Porter & Hedges, Joshua Nielson Eppich Shannon, Gracey, Ratliff & Miller, LLP, Thomas Andrew Woolley, III, Carrigan, McCloskey, & Roberson L.L.P., Houston, TX, for Plaintiff.

Lisa Marie Norman, Attorney at Law, Houston, TX, Annie E. Catmull, Melissa Anne Haselden, Edward L. Rothberg, Hoover Slovacek LLP, Houston, TX, for Defendants.

MEMORANDUM OPINION

MARVIN ISGUR, Bankruptcy Judge.

Diamond Beach VP, LP was formed for the purpose of developing Diamond Beach Condominiums, a 240 unit luxury condominium project in Galveston, Texas. Diamond Beach completed 116 of these units, with financing for the land and construction provided by International Bank of Commerce. The debt to IBC was guaranteed, in part, by Diamond Beach's principal owner, Randall Davis.

For several reasons, including the devastation caused by Hurricane Ike, Diamond Beach was unable to repay IBC. A chapter 11 bankruptcy case ensued. Diamond Beach's confirmed plan of reorganization provided for the Bankruptcy Court to value Diamond Beach's unsold condominium units and undeveloped land for the purposes of establishing a deficiency claim and a claim on the Davis guaranty.

The Court determines that the value of the remaining Diamond Beach Property is $21,533,898.51. The parties have stipulated that the total owed to International Bank of Commerce is $27,578,592.89. Accordingly, the deficiency is $6,044,694.38.

Background

I. History of Diamond Beach

In 2005, Houston real estate developer Randall Davis formed Diamond Beach for the purpose of developing a luxury condominium project in Galveston, Texas. ECF No. 41 at 2. The Diamond Beach Property originally consisted of a 7.89 acre tract of land located at 10300 Seawall Boulevard, Galveston, Texas.

On September 20, 2006, Diamond Beach executed a $41,900,000.00 real estate lien note to IBC. Pl.'s Ex. 11. The parties contemporaneously executed a Construction Loan Agreement. Pl.'s Ex. 11. The Diamond Beach Note is secured by a first lien Deed of Trust, Assignment of Rents, Security Agreement and Financing Statement dated September 20, 2006, recorded in the Real Property Records of Galveston County, Texas. Pl.'s Ex. 11. IBC made two subsequent loans to Diamond Beach—an additional $10,000,000.00 on September 27, 2007, and an additional $4,000,000.00 on January 21, 2010. Pl.'s Ex. 11. The subsequent loans were documented by real estate lien notes, deeds of trust and continuing guaranties. Pl.'s Ex. 11.

Randall Davis (Diamond Beach's principal owner) and Gary Leach (Diamond Beach's builder) executed guaranty agreements to IBC. Pl.'s Ex. 11. Pursuant to their guarantees, Mr. Davis and Mr. Leach both unconditionally guaranteed full payment of $10,000,000.00 of outstanding principal, plus all accrued unpaid interest, late charges, attorneys' fees, and all costs incurred by IBC in connection with collection of the Diamond Beach Note and enforcement of the guarantees. Pl.'s Ex. 11.

The Diamond Beach Property is governed by the Declaration of Diamond Beach Condominium and its subsequent amendments. Pursuant to the Declaration, Diamond Beach was to be developed in two phases. Defs.' Ex. 7 at 5. Article IV, Section 5.1 provides that Diamond Beach will consist of a total of 240 Units, including 117 Units in Phase One ¹ and in the event Phase Two is developed as similar Units, 123 Units in Phase Two.² Defs.' Ex. 7 at 5. Article I, Section 1.2 of the Declaration defines the term Common Elements. ³ Defs.' Ex. 7 at 1. Pursuant to Article V, Section 5.3, each Unit, includes an individual share of the Common Elements built on Phase One. Defs.' Ex. 7 at 5. Article IX, Section 9.1(a) provides that the percentage of the undivided interest in the Common Elements allocated to each Unit is based on one share to each Unit compared with the total shares allocated to all the Units in the Condominium. Defs.' Ex. 7 at 13. The liability for Common Elements is allocated in an identical manner. Defs.' Ex. 7 at 14.

Diamond Beach is a Class A quality property with first class resort style amenities. ECF No. 41 at 3; see also Defs.' Ex. 13. The Diamond Beach Property has a heated indoor pool, a large bar, state of the art fitness center, a kids club, private wine room, game room, Wii room, a business center, a lazy river, the largest resort pool in Texas (over 300 feet long), outdoor cabanas and access to a private beach. ECF No. 41 at 3; see also Defs.' Ex. 13.

Marketing of the Phase One units began in 2006. In September, 2008, Hurricane Ike made landfall at Galveston, causing approximately $2,000,000.00 in damage to Diamond Beach. ECF No. 41 at 4. The consequences of Hurricane Ike depressed the real estate market in Galveston making it difficult to sell the condominium units in Phase One. ECF No. 41 at 4. Shortly after Hurricane Ike, the mortgage market collapsed, exacerbating the difficulty in selling Phase One condominiums. ECF No. 41 at 4. Phase One was eventually completed in 2009. While he was still the principal owner of Phase One, Mr. Davis was able to sell seventy five of the 116 units, but was unable to begin construction of Phase Two.

II. Events Preceding Chapter 11 Filing

Diamond Beach was required to make monthly interest payments on the twentieth calendar day of each month. Pl.'s Ex. 11. The last interest payment IBC received was in May, 2011. Pl.'s Ex. 11. On October 18, 2011, IBC notified Diamond Beach, Mr. Davis and Mr. Leach of the default under the Diamond Beach Note, giving them ten days to cure the default. No party timely cured the default. ECF No. 1 at 4.

During July 2011, Mr. Davis sent one or two letters to IBC in an attempt to settle or restructure the loan and to be released from his guarantee. Hearing Transcript, ECF No. 106 at 212. In late 2011 through early 2012, Mr. Davis had several video conference calls with Dennis Nixon, the Chairman of IBC, in an attempt to resolve the Diamond Beach dispute. Hearing Transcript, ECF No. 106 at 210. During one of these video conference calls, Mr. Nixon threatened to make Mr. Davis' development career very difficult if Mr. Davis did not do what Mr. Nixon asked him to do regarding Diamond Beach. Hearing Transcript, ECF No. 106 at 217.

Both the Diamond Beach Note and the Guaranty Agreements contained arbitration provisions requiring the parties to settle relevant disputes through arbitration. See Pl.'s Exs. 2 & 4. Despite these arbitration provisions, on March 1, 2012, IBC filed its Original Petition and Emergency Application for Appointment of a Receiver against Diamond Beach, Mr. Davis and Mr. Leach in the 165th Judicial District Court of Harris County, Texas. ECF No. 1 at 5. The State Court Lawsuit contained allegations that Mr. Davis and Mr. Leach were acting to defraud IBC by siphoning money into annuities and family limited partnerships. Defs.' Ex. 64. The State Court Lawsuit was dismissed by IBC only twelve days after it was filed, and IBC sought to resolve the dispute through arbitration. ECF No. 1 at 5. However, the damage from the publicly-filed lawsuit was done. On March 13, 2012, the Houston Chronicle published an article regarding the State Court Lawsuit and the allegations of fraud against Mr. Leach and Mr. Davis. Defs.' Ex. 67. Since the publication of the article, Mr. Davis has been unable to obtain financing for any large development project.⁴ Hearing Transcript, ECF No. 106 at 225.

Although these events are not directly related to the value of the condominiums, they do demonstrate that Mr. Nixon may have been implementing his threats against Mr. Davis. Because of the very real possibility that IBC implemented Mr. Nixon's threats against Mr. Davis, the Court will skeptically review the testimony given by IBC's agents and witnesses.

III. Procedural History

On April 2, 2012, Diamond Beach filed its voluntary chapter 11 petition (Case No. 12–10175). Diamond Beach and IBC negotiated a Settlement Agreement that dictated the terms of Diamond Beach's chapter 11 plan. ECF No. 1 at 5. On July 2, 2102, the Court entered its Agreed Order Confirming Chapter 11 Plan of Liquidation. Case No. 12–10175, ECF No. 106. The plan incorporated the parties' Settlement Agreement. The Settlement Agreement provided in pertinent part that:

• IBC's prepetition claim was allowed in the amount of $28,193,759.32; ⁵

• The parties agreed to a valuation determination of the Diamond Beach Property by the Bankruptcy Court;

• The deficiency of the allowed IBC claim would be the difference between $28,193,759.32 and the value of the Diamond Beach Property as determined by the Bankruptcy Court;

• The amount bid at the foreclosure sale of the Diamond Beach Property would not be dispositive of its value;

• The deficiency claim, if any, would be an allowed unsecured claim and would be paid as follows:

• Up to $2,500,000.00 in cash from Randall Davis;

• Up to $1,500,000.00 in cash from liquidation of annuities from Randall Davis;

• Up to $6,000,000.00 in an agreed judgment entered in this Adversary;

• IBC was allowed to foreclose on the Diamond Beach property in June 2012.

Pl.'s Ex. 11.

On June 5, 2012, IBC foreclosed on the unsold units in Phase One and on the undeveloped Phase Two land. ECF No. 41 at 26. The successful bidder was Diamond Beach Holdings, LLC, an entity owned by IBC. Diamond Beach Holdings purchased the Diamond Beach Property for $18,000,000.00. ECF No. 41 at 26.

IBC filed its Original Complaint on June 26, 2012. ECF No. 1. Diamond Beach filed its Answer on July 10, 2012. ECF No. 11. Mr. Davis filed his Answer on July 12, 2012. ECF No. 12. Trial began on May 13, 2013 and concluded on May 23, 2013. Diamond Beach and Mr. Davis submitted their Post–Trial Brief on June...