Justice Oaks II, Ltd., In re

• Decision Date: 25 April 1990
• Docket Number: No. 89-3016,89-3016
• Citation: 898 F.2d 1544
• Parties: 22 Collier Bankr.Cas.2d 1304, Bankr. L. Rep. P 73,353 In re JUSTICE OAKS II, LTD. Chapter 11, Debtor. Bruce WALLIS, Kate Wallis, Plaintiffs-Appellants, v. JUSTICE OAKS II, LTD., Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1544

898 F.2d 1544

22 Collier Bankr.Cas.2d 1304, Bankr. L. Rep. P 73,353

In re JUSTICE OAKS II, LTD. Chapter 11, Debtor.

Bruce WALLIS, Kate Wallis, Plaintiffs-Appellants, v. JUSTICE OAKS II, LTD., Defendant-Appellee.

No. 89-3016.

United States Court of Appeals, Eleventh Circuit.

April 25, 1990.

S. Thomas Padgett, Keego Harbor, Mich., for plaintiffs-appellants.

Shirley Arcuri, Tampa, Fla., George L. Cass, Pittsburg, Pa., for defendant-appellee.

Appeal from the United States District Court for the Middle District of Florida

Before TJOFLAT, Chief Judge, HATCHETT, Circuit Judge, and MORGAN, Senior Circuit Judge.

TJOFLAT, Chief Judge:

Bruce and Kate Wallis (the Wallises) appeal the district court's order affirming three separate orders entered by the bankruptcy court in In re Justice Oaks II, Ltd., No. 86-1976-8P1, a reorganization of Justice Oaks II, Ltd. (Justice Oaks) under chapter 11 of the Bankruptcy Code, 11 U.S.C. Secs. 1101-1174 (1988). The three bankruptcy court orders were consolidated for the purpose of appeal to the district court. The district court affirmed the bankruptcy court orders on the ground of res judicata, holding that the Wallises' claims were barred by prior orders of the bankruptcy court. We disagree, in part, with the district court's reasoning but nevertheless affirm the district court and, by operation of law, the bankruptcy court.

I.

Justice Oaks, a limited partnership, owned a large residential development in Sarasota County, Florida. When the development failed, Justice Oaks filed, on May 15, 1986, a petition for reorganization under chapter 11. At that time, Justice Oaks had four potential major creditors:

1. South Florida Savings Bank (South Florida). South Florida held a first mortgage on all of Justice Oaks' property, with the exception of a guest house and an administration building in the development. The mortgage was South Florida's security for a $27 million loan to Justice Oaks.

2. Allegheny Oaks of Florida, Inc. (Allegheny). Allegheny, a former general partner of Justice Oaks, held a mortgage second in priority to South Florida's first mortgage on the majority of Justice Oaks' property. The second mortgage was Allegheny's security for Justice Oaks' promissory note to Allegheny in the amount of $7,334,746.

3. Park Bank of Florida (Park Bank)/FDIC. Park Bank, now succeeded by the FDIC, held a mortgage on the guest house and administration building as security for its loan to Justice Oaks in the amount of $4,500,000.

4. Bruce and Kate Wallis. The Wallises personally guaranteed Park Bank's loan to Justice Oaks, but the Wallises' liability on that guarantee appears to have been limited to $3,000,000.

On November 11, 1986, the Wallises filed a proof of claim asserting that, on the basis of their personal guarantee of the Park Bank loan, Justice Oaks "was at the time of the filing of the Petition initiating this case, and still is, contingently indebted to this Claimant in the sum of $4,500,000 plus interest." Significantly, neither Park Bank nor its successor, the FDIC, has foreclosed on the mortgage; therefore, the Wallises were not then, and are not now, indebted to Park Bank or the FDIC on the guarantee.

After several creditors had filed proofs of claims, Justice Oaks, Justice, Inc. (Justice) (Justice Oaks' parent corporation), Allegheny, and South Florida entered into negotiations to settle the various claims against Justice Oaks. The parties agreed that Justice Oaks would sell its property, with the exception of the guest house and administration building, to Arvida Disney Corporation for $25.7 million; $3.7 million would be paid at closing, and the remainder would be paid under a six-year purchase-money note. Arvida would also secure its obligation to Justice Oaks with a first mortgage on all of the property. Upon closing, Justice Oaks would apply the $3.7 million cash proceeds as follows:

1. $1,000,000 to Allegheny in full satisfaction of Justice Oaks' promissory note to Allegheny;

2. $25,000 for tax liabilities;

3. $50,000 for administrative expenses;

4. $100,000 to all unsecured creditors; and

5. the remainder to South Florida.

Furthermore, Justice Oaks would deliver Arvida's promissory note and mortgage to South Florida, and, in exchange for the cash, note, and mortgage, South Florida would release Justice Oaks from its debt to South Florida. Thus, Arvida would receive the Justice Oaks property free and clear of all liens.

On December 3, 1986, Justice Oaks moved the bankruptcy court to hold an expedited hearing on the proposed sale to Arvida, shorten notice, and approve the sale. The next day, the court granted the motion to shorten notice and scheduled the hearing for December 12. The Wallises received notice of this order. On December 8, Justice Oaks moved the court to authorize settlement of the claims, as outlined above, and requested that the hearing on this matter be held on December 12 as well. The hearing took place on December 12, and the court granted the motion to sell the property to Arvida free and clear of all liens and authorized the parties to settle the claims as discussed above. Apparently, the Wallises did not appear at this hearing but received notice of the court's orders.

On January 20, 1987, Justice Oaks filed an amended proposed plan of reorganization (plan), which essentially restated the settlement agreement. The plan set out various classes of creditors and proposed the following disposition of funds:

1. South Florida to receive cash, note, and mortgage from sale of property to Arvida;

2. Allegheny to receive $1,000,000;

3. FDIC, as successor to Park Bank, to receive the guest house and administration building free and clear of all liens; and

4. all contingent creditors, including the Wallises, to receive nothing.

South Florida, Allegheny, and the FDIC were classified as secured creditors, while the Wallises were listed as unsecured creditors.

On May 15, 1987, after receiving notice of the plan, the Wallises filed (1) a clarified proof of claim, which stated that the claim was not contingent, and (2) an objection to confirmation of the plan. In their objection to confirmation, the Wallises asserted that Rodney Propps, a general partner of Justice Oaks, made several fraudulent misrepresentations in order to convince them to guarantee the Park Bank loan. The Wallises alleged that these misrepresentations were part of a scheme involving Propps, Justice Oaks, Allegheny, and South Florida that was designed to raise sufficient funds to buy out Allegheny's partnership interest in Justice Oaks. Thus, the Wallises argued that the plan was not fair or equitable since it proposed large payments to Allegheny and South Florida while leaving the Wallises liable for any deficiency resulting from the FDIC's sale of the guest house and administration building.

On May 15, 1987, the Wallises filed in the bankruptcy court an adversary complaint against Justice Oaks, South Florida, and Allegheny. The Wallises filed an amended complaint on June 8, 1987 against the same parties. The amended complaint essentially restated the factual allegations contained in the Wallises' objection to confirmation but requested two different remedies. First, it asked the court to declare an equitable lien in favor of the Wallises on the proceeds from the sale to Arvida "in the amount equal to [the Wallises'] liability on the guaranties." Second, it requested the court equitably to subordinate, under 11 U.S.C. Sec. 510, Allegheny's and South Florida's claims to the Wallises' own claim.

On June 15, 1987, Allegheny filed a motion to dismiss the Wallises' adversary complaint. Allegheny argued, inter alia, that, because the Wallises had not been required to pay anything on their guarantee of the Park Bank loan, they had no claim and therefore could not request subordination or an equitable lien. On the same day, the bankruptcy court overruled the Wallises' objection to confirmation of the plan. The court held that its order authorizing Justice Oaks to settle Allegheny's and South Florida's claims established the law of the case and that the Wallises, who had not objected to the proposed settlement, could not object to the plan, which was essentially a restatement of the settlement agreement. The court then confirmed the plan, and the Wallises filed an appeal in the district court. The district court dismissed the appeal because the Wallises failed to file their notice of appeal within ten days of entry of judgment. See Bankr.R. 8002(a) & advisory committee note.

On July 3, 1987, the Wallises moved the bankruptcy court to maintain in escrow the cash proceeds from the sale of Justice Oaks' property to Arvida. The Wallises argued that it would be improper to allow those funds to be disbursed to Allegheny and South Florida while the adversary proceeding against those parties was pending. On July 31, 1987, the court denied this motion, and the Wallises again appealed to the district court. Shortly after the bankruptcy court denied this motion, the Wallises dismissed South Florida from the adversary proceeding and dropped their objection to disbursement of funds to South Florida.

For the next several months, the Wallises filed numerous motions for rehearing and reconsideration, appeals, and motions to stay payment to Allegheny pending resolution of the other motions and appeals. Finally, on February 4, 1988, the bankruptcy court established February 19, 1988, as the last day on which a creditor or interested party could object to a previously filed claim. Not surprisingly, on February 16, the Wallises filed an objection to Allegheny's claim and, on February 24, filed an amended objection. The Wallises, relying on essentially the same factual allegations as contained in the adversary complaint and objection to confirmation, argued that Allegheny's claim arose out of the redemption of its partnership interest in Justice Oaks and therefore represented a return...