Kraz, LLC v. Branch Banking & Tr. Co. (In re Kraz, LLC)
| Decision Date | 24 January 2023 |
| Docket Number | 8:15-bk-07039-CED,Adv. 8:15-ap-00655-CED |
| Court | United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Middle District of Florida |
| Parties | In re: Kraz, LLC, Debtor. v. Branch Banking & Trust Company, Defendant. Kraz, LLC, Plaintiff, |
FINDINGS OF FACT AND CONCLUSIONS OF LAW ON REMAND
In accordance with the District Court's order vacating this Court's Final Judgment and remanding the proceeding,[1] the Court enters the following findings of fact and conclusions of law on the issues that are the subject of the District Court's remand.
Kraz LLC ("Kraz") is the debtor in this Chapter 11 case. Branch Banking & Trust ("BB&T") was the holder of a promissory note (the "Note") secured by a mortgage (the "Mortgage") on property owned by Kraz.
BB&T timely filed a $6.3 million proof of claim in Kraz's bankruptcy case (the "Claim"). The Claim consists of roughly $4.7 million in principal; $1 million in accrued interest; $225,000 in post-maturity default interest (through the petition date); $290,000 in real estate tax advances; and $9,000 for forced-place insurance.[2]After it filed the Claim BB&T asserted that it was also entitled to $670,000 in attorney's fees it previously incurred in a state court foreclosure action (the "Foreclosure Action").[3]
Kraz filed an objection to BB&T's claim (the "Objection") and with it a counterclaim seeking a judgment for damages against BB&T for breach of contract, fraud, constructive fraud, fraudulent misrepresentation, negligent misrepresentation, slander of title, tortious interference, and a willful violation of the automatic stay.[4]
Kraz and BB&T both filed motions for summary judgment. Bankruptcy Judge Michael G. Williamson determined (a) BB&T was not entitled to the $1 million in accrued interest nor to its $670,000 claimed attorney's fees, and (b) BB&T was entitled to judgment on Kraz's counterclaims for fraud, fraudulent misrepresentation, negligent misrepresentation, and willful violation of the automatic stay.[5]
After a multi-day trial, Judge Williamson entered Findings of Fact and Conclusions of Law on the remaining issues. After ruling in favor of BB&T on Kraz's remaining tort claims, Judge Williamson addressed Kraz's Objection to BB&T's Claim and Kraz's counterclaim for breach of contract (the "Breach of Contract Counterclaim").[6] The Objection and the Breach of Contract Counterclaim were predicated on the same allegations:
First, Judge Williamson ruled that because the allowance or disallowance of claims and counterclaims against persons filing claims against the estate are core proceedings,[7] the Bankruptcy Court has constitutional authority to enter a final judgment on the Objection and the Breach of Contract Counterclaim.[8] And because Kraz's objection to BB&T's claim for post-maturity default interest and its Breach of Contract Counterclaim were predicated on the same allegations, Judge Williamson concluded that his ruling on the Objection necessarily resolved the Breach of Contract Counterclaim.[9]
Second, Judge Williamson ruled that BB&T's claim for $290,000 in property tax advances was barred by the doctrine of res judicata because, despite BB&T's having sought recovery of the property tax advances in the Foreclosure Action, the state court did not award them to BB&T.[10]
Third, Judge Williamson ruled that BB&T was not entitled to post-maturity default interest.[11] Judge Williamson noted that Florida courts have held that a lender's refusal to accept a proper tender cuts off the lender's right to collect interest,[12] and he concluded that (a) Kraz could not sell or refinance the property securing the Mortgage-and thus pay off the Note-without an accurate estoppel letter; and (b) BB&T's failure to give Kraz an accurate estoppel letter prevented Kraz from tendering the balance due on the Note before it matured.[13]
Fourth, Judge Williamson determined that Kraz was entitled to recover damages on its Breach of Contract Counterclaim because: (a) Florida Statute § 701.04-which requires a mortgagee to provide a mortgagor with an estoppel letter upon request-was incorporated into the Mortgage; (b) BB&T breached the Mortgage when it failed to give Kraz an accurate estoppel letter; (c) if BB&T had given Kraz an accurate estoppel letter, Kraz could have sold its property, paid off BB&T, and avoided foreclosure; and (d) as a result of BB&T's failure to give Kraz an accurate estoppel letter, Kraz was unable to sell its property, was forced to file bankruptcy, and incurred $1.18 million in attorney's fees and costs.
Based on his summary judgment ruling and his Findings of Fact and Conclusions of Law, Judge Williamson entered a final judgment (the "Final Judgment") that (a) disallowed BB&T's claim to the extent it included roughly $1 million in accrued interest, $225,000 in post-maturity default interest, $288,000 in property tax advances, and the $670,000 in attorney's fees it had later requested; and (b) awarded Kraz damages of $1.18 million on its Breach of Contract Counterclaim.[14]
BB&T appealed the Bankruptcy Court's Final Judgment to the District Court. The issues on appeal were Judge Williamson's rulings on (a) BB&T's entitlement to reimbursement for property tax advances and post-maturity default interest, and (b) the Breach of Contract Counterclaim. The District Court vacated the Final Judgment.[15]
First, the District Court reversed Judge Williamson's ruling on BB&T's claim for reimbursement of property tax advances. The District Court held that the doctrine of res judicata did not preclude the claim because "the state court judgment did not expressly address the property taxes that BB&T paid on behalf of Kraz."[16]Put another way, the District Court held there was no "clear-cut" adjudication on the merits of BB&T's claim for property tax advances in the Foreclosure Action.[17]
Second, the District Court reversed Judge Williamson's ruling that BB&T was not entitled to post-maturity default interest. The District Court held that the "failure to provide an accurate estoppel letter does not excuse the promisor's contractual obligation to pay interest due under the note."[18]
Further, the District Court ruled that even if a lender's failure to provide an accurate estoppel letter could excuse a promisor's obligation to pay interest, Judge Williamson clearly erred in finding that BB&T's failure prevented Kraz from tendering the balloon payment before its maturity date for at least two reasons: (a) "there was no evidence that Kraz accepted an offer from iStorage or provided a counteroffer to its proposed terms" and Kraz's "lack of engagement in the negotiation process belie[d] its contention it was ready to sell to iStorage;"[19] and (b) Judge Williamson's "finding that the only way Kraz could tender the balloon payment would be to either sell or refinance the property ha[d] no evidentiary support."[20]
Finally, the District Court held that the Bankruptcy Court does not have constitutional authority to enter a final judgment on the Breach of Contract Counterclaim. Although the District Court recognized that the Bankruptcy Court has constitutional authority to enter a final judgment on a state law counterclaim when the counterclaim is necessarily resolved as part of the claims adjudication process, the District Court held that Kraz's Breach of Contract Counterclaim was not necessarily resolved by Judge Williamson's ruling on BB&T's Claim.[21] Accordingly, the District Court vacated the Final Judgment without deciding the merits of BB&T's appeal of Judge Williamson's ruling on the Breach of Contract Counterclaim.
After vacating the Final Judgment, the District Court remanded the case back to the Bankruptcy Court for proceedings consistent with its ruling. The District Court directed the Bankruptcy Court to resolve the property tax portion of BB&T's Claim;[22] however, the District Court did not give the Bankruptcy Court specific directions with respect to the Breach of Contract Counterclaim.
Thereafter, Judge Williamson passed away, and the case was reassigned to Chief Judge Caryl E. Delano. Chief Judge Delano certifies under Federal Rule of Civil Procedure 63 that she is familiar with the record in this proceeding and that she is able to determine this proceeding on remand without prejudice to the parties.
Having carefully considered the record, on remand, the Court concludes as follows:
In August 2009, BB&T acquired the Note secured by the Mortgage on a self-storage facility owned by Kraz (the "Property").[24] The Note provided for interest at the rate of 5.08% per annum and, if the balance due on the Note was not paid prior to its maturity date, for post-maturity default interest at the rate...
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