Lingham Rawlings, LLC v. Gaudiano (In re Lingham Rawlings, LLC)

• Decision Date: 03 April 2013
• Docket Number: Adv. Proc. No. 10-3125,Case No. 10-32769
• Parties: In re LINGHAM RAWLINGS, LLC Debtor LINGHAM RAWLINGS, LLC Plaintiff v. SALVADOR A. GAUDIANO, individually and d/b/a BRIARCLIFF MANAGEMENT COMPANY Defendant
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Eastern District of Tennessee

In re LINGHAM RAWLINGS, LLC Debtor

LINGHAM RAWLINGS, LLC Plaintiff v. SALVADOR A. GAUDIANO, individually and d/b/a BRIARCLIFF MANAGEMENT COMPANY Defendant

Case No. 10-32769

Adv. Proc. No. 10-3125

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF TENNESSEE

FILED: April 3, 2013

MEMORANDUM

APPEARANCES:

GRIBBLE CARPENTER & ASSOCIATES, PLLC

Keith L. Edmiston, Esq.

Attorneys for Plaintiff

JONES, MEADOWS & WALL, PLLC

J. Thomas Jones, Esq.

Attorneys for Defendant

RICHARD STAIR, JR.

UNITED STATES BANKRUPTCY JUDGE

This adversary proceeding is before the court upon the Complaint filed by the Plaintiff on November 11, 2010, seeking a monetary judgment against the Defendant for breach of contract, fraudulent concealment, conversion, breach of fiduciary duties, professional negligence, and tortious interference with business relationships; seeking to avoid and recover fraudulent transfers under 11 U.S.C. § 548(a)(1)(B) (2006) and 11 U.S.C. § 550(a)(1) (2006), respectively; seeking to avoid fraudulent transfers under 11 U.S.C. § 544(b)(1) (2006) through Tennessee Code Annotated §§ 66-3-305 and 66-3-306(a) (2004) and to recover the avoided transfers under 11 U.S.C. § 550(a)(1) (2006); seeking to avoid and recover preferential transfers under 11 U.S.C. § 547 (2006) and 11 U.S.C. § 550(a)(1) (2006); seeking an accounting; for equitable subordination under 11 U.S.C. § 510(c) (2006) and/or 105(a) (2006); and seeking disallowance of claims under 11 U.S.C. § 502(d) (2006). The Defendant's Answer was filed by the Defendant on January 21, 2011, in which he denied the Plaintiff's allegations and entitlement to the relief sought.¹

The trial was held on July 31 and August 1, 2012. The record before the court consists of Stipulations filed by the parties on July 20, 2012, one stipulated exhibit, thirty-five exhibits entered into evidence, and the testimony of four witnesses, Eric Williams, David Michael Costello, the Plaintiff through its sole member, Sharon L. Power, and the Defendant. Following the trial, the court directed the parties to file proposed findings of fact and conclusions of law, which were filed on November 16, 2012.

This adversary proceeding is, in part, a core proceeding under 28 U.S.C. § 157(b)(2)(A), (E), (F), (H), and (O) (2006), and, in part, a non-core proceeding under 28 U.S.C. § 157(c)(1) (2006) that is related to the underlying bankruptcy case. The parties have expressly consented to entry of final orders, including a final judgment, by the bankruptcy court as to all issues raised. SCHED. ORDER at ¶ 1.

I

In December 2000, the Plaintiff, a Tennessee limited liability company, was formed for the purpose of purchasing and operating a commercial building by Sharon L. Power, a realtor for approximately thirty-two years who is its sole owner/member and chief manager. Prior to this date, on October 10, 2000, Ms. Power entered into a Real Estate Sales Contract (Sales Contract) for the purchase of a shopping center located at 7212 Kingston Pike, Knoxville, Tennessee (Shopping Center) from the Defendant, who owned a 100% interest in the Shopping Center at the time, for the contemplated purchase price of $2,750,000.00. TRIAL EX. 22. Under the terms of the Sales Contract, the sale was subject to the following conditions:

1. Buyer obtaining mortgage of approximately $2,000,000.00 at market rate.

2. Seller guaranteeing Metz & Kirschner rent through the end of their lease.

3. Seller guaranteeing Diversified Insurance rent for a period of one year from closing.

4. Briarcliff Management entering into a management agreement for a period of two (2) years for a fee of 2%.

TRIAL EX. 22 at ¶ 15. The Defendant, who was a certified public accountant in Pennsylvania and New Jersey prior to 1986, owns and operates the sole proprietorship known as BriarcliffManagement, through which he managed the Shopping Center. He is also an officer in a corporation called Miners and owns a 16 2/3% interest in Diversified Energy, Inc. and a 25% interest in Diversified Holdings, Inc., which together comprise the partnership known as Station West.²

As evidenced by the Settlement Statement, the sale of the Shopping Center to Ms. Power closed on February 28, 2001. TRIAL EX. 30. The Plaintiff, in whom title to the Shopping Center was vested, financed approximately $2,000,000.00 of the $2,806,031.03 final purchase price through a loan with Bridger Commercial Funding under the terms of an Amended and Restated Promissory Note Secured by Deed of Trust (Promissory Note) dated February 26, 2001, with the loan secured by a Deed of Trust and Absolute Assignment of Rents and Leases and Security Agreement (and Fixture Filing) executed on February 28, 2001. TRIAL EX. 18; TRIAL EX. 19. The Plaintiff's required monthly principal and interest payments to Bridger Commercial Funding under the Promissory Note were $15,370.14. TRIAL EX. 18 at ¶ 4.3. Additionally, pursuant to Exhibit A to Promissory Note Additional Terms and Conditions attached to the Promissory Note, the Plaintiff was also required to make the following payments to Bridger Commercial Funding:

3. Impounds.

3.1 Amounts. Borrower shall deposit with Lender the amounts ("Impounds") stated below on the dates stated below, for the purpose of paying the costs stated below:

(a) Taxes. (i) $21,400.14 on the Closing Date, and (ii) on the first Payment Date on which both principal and interest under the Loan are payable and on each Payment Date thereafter, an amount estimated from time to time by Lenderin its sole discretion to be sufficient to pay for taxes and other liabilities payable by Borrower under Section 6.8 of the Deed of Trust. The initial estimated amount to be deposited by Borrower on each Payment Date is $3,566.69.

(b) Insurance. (i) $1,905.00 on the Closing Date, and (ii) on the first Payment Date on which both principal and interest under the Loan are payable and on each Payment Date thereafter, an amount estimated from time to time by Lender in its sole discretion to be sufficient to pay for insurance payable by Borrower under Section 6.9 of the Deed of Trust. The initial estimated amount to be deposited by Borrower on each Payment Date is $635.33.

. . . .

(d) Tenant Improvements. $4,108.00 on the first Payment Date on which both principal and interest under the Loan are payable and on each Payment Date thereafter until the third anniversary of the date hereof and until the sum of $150,000.00 is on deposit for the payment of tenant improvements, brokerage commissions and other leasing costs that may be required for new tenants in the Property; provided, however, that if sums are drawn from this Impound for the payment of any said tenant improvements, brokerage commissions and other leasing costs resulting in the balance on deposit being reduced to an amount less than $150,000.00, then Borrower shall make monthly payments in the amount set forth above commencing on the next Payment Date and continuing on each Payment Date thereafter until the balance on deposit is restored to $150,000.00. Amounts on deposit for this Impound shall bear interest at Lender's standard interest rate for passbook savings deposit accounts in effect from time to time for balances equivalent to the balance of this Impound.

. . . .

(g) Capital Improvements. $467.00 on the first Payment Date and on each Payment Date thereafter for Capital Improvements . . .[.]

. . . .

7. Deposits to the Debt Service Reserve. Borrower shall deposit with Lender the reserve amounts stated below on the dates stated below for the purpose of paying the costs stated below:

(a) Debt Service. $1,500.00 ("Debt Service Deposit") on the first Payment Date on which both principal and interest under the Loan are payable and on each Payment Date thereafter until the date which is thirty (30) months (i.e., August 26, 2003) from the date hereof and until the sum of $46,500.00 is on deposit for theLender to apply to the repayment of the principal balance of this Note in order to satisfy the debt service coverage ratio requirement . . . of not less than 1.30 to 1.00; provided, however, that from and after the date that the sum of $46,500.00 is on deposit with Lender as the Debt Service Reserve . . ., if sums are drawn from said Debt Service Reserve for the repayment of the principal balance of this Note in order to satisfy the debt service coverage ratio requirement resulting in the balance of the Debt Service Reserve being reduced to an amount less than $46,500.00, then Borrower shall make a monthly Debt Service Deposit commencing on the next Payment Date and continuing on each Payment Date thereafter until the balance on deposit is restored to $46,500.00.

. . . .

TRIAL EX. 18 at Ex. A ¶¶ 3, 7. Including the impounds and additional payments required under the Promissory Note, the Plaintiff's total monthly obligation to Bridger Commercial Funding was $25,647.16.

As an additional condition of financing, Bridger Commercial Funding required that the Plaintiff engage arm's length management for the Shopping Center. Accordingly, on February 28, 2001, the Plaintiff entered into a Management Agreement with the Defendant, through his sole proprietorship Briarcliff Management, to manage the Shopping Center. TRIAL EX. 5. Under the terms of the Management Agreement, the Defendant was appointed as "sole and exclusive Agent of Owner to lease and manage the property [located at 7212 Kingston Pike, Knoxville, Tennessee 37919]" for a term of two years, to be automatically renewed annually unless terminated. TRIAL EX. 5 at ¶¶ 1.1 - 1.3. The Management Agreement imposed upon the Defendant a number of duties and responsibilities, including but not limited to establishment of a separate operating account for the deposit of rents and security deposits, enforcement of leases, remitting payments for operating expenses, providing financial reports, advertising the property, maintenance and repair of the property, and contracting for utilities as follows:

2.1 OPERATING (AND OR) RESERVE ACCOUNT(S)

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