Merritt v. MidAtlantic Farm Credit (In re Merritt)

• Decision Date: 25 March 2015
• Docket Number: Case No. 11–18134 JKF,Adversary No. 13–0532
• Citation: 529 B.R. 845
• Parties: In re Linda Merritt, Debtor. Linda Merritt, Plaintiff, v. MidAtlantic Farm Credit, ACA., et al, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

529 B.R. 845

In re Linda Merritt, Debtor.Linda Merritt, Plaintiff

v.MidAtlantic Farm Credit, ACA., et al, Defendants.

Case No. 11–18134 JKF

Adversary No. 13–0532

United States Bankruptcy Court, E.D. Pennsylvania.

Signed March 25, 2015

Barry F. Penn, Law Offices of Barry F. Penn PC, Philadelphia, PA, Mark A. Cronin, Spring House, PA, for Plaintiff.

Erik L. Coccia, Dilworth Paxson LLP, Francis J. Lawall, Pepper Hamilton LLP, Philadelphia, PA, Michael S. Hino, Pepper Hamilton LLP, Berwyn, PA, Richard N. Lipow, Lipow Law Office, Malvern, PA, for Defendants.

OPINION

Jean K. FitzSimon, United States Bankruptcy Judge

Before the Court are two motions (collectively the “Motions”) involving the complaint (“Complaint”). Defendant, Cheshire Land Preservation Fund (“Cheshire”), moves to have the Complaint, which asserts a fraudulent conveyance claim against it under Bankruptcy Code § 548(a)(1)(B), dismissed with prejudice. In contrast, plaintiff/debtor, Linda Merritt (“Debtor”), moves the Court for leave to file an amended complaint (“Amended Complaint”) which would add a derivative claim against Cheshire for breach of fiduciary duty and dissipation of assets. The derivative claim would be brought by Debtor on behalf of an entity called Merritt Land LLC (“Merritt Land”) of which Debtor alleges she is a member and creditor. Debtor's relationship to Merritt Land will be explained in detail below. Upon review of the Motions, the Court concludes that Cheshire's motion shall be granted and Debtor's motion shall be denied.¹

II. BACKGROUND²

A. The Entities

In or before December of 2004, Debtor and two New York entities known as R & R Capital LLC and FTP Capital LLC (collectively referred to hereinafter as “R & R”) formed nine or ten Delaware limited liability companies (the “Entities”). Complaint ¶ 7. Merritt and R & R were co-equal owners of the Entities, having a 50% interest in each of them. Id. The Entities invested in real estate and thoroughbred horses. Id. The Debtor was appointed the managing member of the Entities. Id. Merritt Land was one of the Entities. Id. ¶ 7 n.1.³

B. Purchase of Apple Grove Property

In 2003, ninety acres of land on Apple Grove Road in East and West Marlborough Townships, Chester County, Pennsylvania (the “Apple Grove Property”), were purchased, on behalf of Merritt Land, for $1.3 million. Complaint ¶ 10.⁴ The purchase price was funded by Debtor's capital contribution to Merritt Land of $400,000 and a loan to Merritt Land from MidAtlantic Farm Credit, A.C.A. (“MidAtlantic”), in the amount of $975,000. Id. The loan to Merritt Land was memorialized in a note and secured by a mortgage on the Apple Grove Property. Id. Debtor personally guaranteed payment of the note. Id.

C. Litigation

From 2005 through 2008, R & R initiated six separate lawsuits in four different jurisdictions against Debtor and/ or the Entities, allegedly “seeking her removal as Managing Member of the Entities and the dissolution thereof.” Complaint ¶ 13. One of the lawsuits was filed by R & R against Debtor in the Chancery Court in Delaware.⁵ See R & R Capital, LLC v. Merritt, 2009 WL 2937101, at *1 (Del.Ch. September 3, 2009).⁶ In this action, R & R sought a declaration that, in August of 2008, it had properly removed Debtor as the Managing Member of the Entities for “cause” pursuant to the Entities' operating agreements. Id.

On September 3, 2009, the Chancery Court issued a letter decision (“Letter Decision”) ruling in R & R's favor on summary judgment and authorizing the appointment of a receiver to “wind up the business and affairs of the Entities.”⁷ Id. In the Letter Decision, the Chancery Court observed as follows:

The Entities' operating agreements set forth the basis for a manager's removal for cause as follows:

The Manager may be removed as Manager for “Cause” upon the written demand of [Plaintiffs]. Such written demand shall set forth with specificity the facts giving rise to such Cause. As used herein, a removal for “Cause” shall mean that the Manager to be removed shall have (a) engaged in fraud or embezzlement, (b) committed an act of dishonesty, gross negligence, willful misconduct, or malfeasance that has had a material adverse effect on the Company or any other Member, or (c) has been convicted of any felony.

2009 WL 2937101, at *2. Describing the conduct which constituted “cause” for R & R's removal of the Debtor as Manager, the Chancery Court opined:

The removal notice was based on Merritt's conduct that was subject to an action entitled R & R Capital v. Merritt, C.A., No. 06–1544, before Judge Mary McLaughlin of the United States District Court, Eastern District of Pennsylvania (the “Pennsylvania Action”)[.] The Pennsylvania Action arose from a dispute between the parties concerning the purchase, possession and ownership of three thoroughbred “pinhooking” horses. R & R purchased the horses from Merritt's wholly-owned company, Mer–Lyn Farms, LLC. In the Pennsylvania Action, R & R sought to obtain possession of two of the pinhooking horses and sought to rescind the transaction whereby it purchased the third pinhooking horse, based on Merritt's misrepresentations regarding the health of the horses.

On April 17, 2009, Judge McLaughlin issued an Order finding in favor of R & R on its rescission and replevin claims and in favor of Merritt with regard to certain expenses associated with training and caring for the horses.Judge McLaughlin found that Merritt engaged in fraud in connection with the challenged transaction. In her written opinion, Judge McLaughlin specifically found that “R & R was induced to purchase [the horses] on the basis of statements by Pelullo and Merritt that were both fraudulent and material.... In these circumstances, the statement that [the horse] was one of the best horses available was a knowing misstatement not in accord with the facts and therefore fraudulent.”⁸

2009 WL 2937101, at *3 (quoting R & R Capita l , LLC v. Merritt, 632 F.Supp.2d 462, 479 (E.D.Pa.2009) ) (emphasis added).

Shortly after issuing the Letter Decision, the Chancery Court appointed Kurt Heyman (“Heyman”) as the receiver. Complaint ¶ 18. On October 2, 2009, Heyman retained Barr Realty (“Barr”) to evaluate the properties which the Entities owned in order to sell them. Complaint ¶ 21. Barr concluded that, in “as is” condition, the asking price for the Apple Grove Property should be $3,200,000 and that “[s]erious offers above $2,700,000 should be considered.” Id. Heyman did not prepare the Apple Grove Property for sale by doing any cleaning, maintenance or minor repairs. Id. When the Apple Grove Property did not sell, Heyman elected to have Barr sell it at a public auction. Id. ¶ 23. At the public auction on April 20, 2010, the high bid for the Apple Grove Property was $1.1 million but Cheshire agreed to purchase the property for $1.25 million. Id. ¶¶ 28, 30. This price was approximately $40,000 more than the mortgage on the property but almost $2 million less than the amount at which it was appraised by Barr and $100,0000 less than its original purchase price. Id. Debtor advised Heyman that she objected to the sale because it would not “generate enough funds to pay the creditors and Mer–Lyn [Farms].” Id. ¶ 29. Nevertheless, Heyman transferred the Apple Grove Property to Cheshire for the aforementioned amount. Id.

On June 21, 2010, Heyman filed a motion for contempt against the Debtor in the Chancery Court in Delaware. See Receiver's Motion for a Finding of Contempt Against Linda Merritt, Chancery Court of Delaware, Case No. 3989–CC, filed June 21, 2010. In the motion, Heyman alleged that Debtor had engaged in various actions to frustrate his ability to expeditiously and efficiently wind up the affairs of the Entities and that such actions were in violation of the Chancery Court's Orders, dated September 14, 2009, November 9, 2009 and February 25, 2010. Id.

On Friday, June 25, 2010, the Chancery Court held a contempt hearing and gave Debtor until noon on Monday, June 28, 2010, to correct her violations of its orders. See R & R Capital, LLC v. Merritt, 2010 WL 2720837 (Del.Ch. June 24, 2010) (scheduling hearing on June 25, 2010); R & R Capital, LLC v. Merritt, C.A. No. 39890CC, 2010 WL 2642656 (Del.Ch. June 28, 2010) (“Contempt Order”) (holding Merritt in contempt of the Court's Orders dated September 14, 2009, November 9, 2009 and February 25, 2010). When Debtor failed to correct the violations, the Chancery Court issued an Order, dated June 28, 2010 (“Contempt Order”):

(i) holding Debtor in contempt;

(ii) removing her as a member of the Entities; and

(iii) decreeing that neither she nor her controlled entities was “entitled to any distribution of the Receivership Entities' assets at the conclusion of their dissolution and winding up.”

Id. ¶ 3(b).

On or about July 28, 2010, Debtor appealed the Contempt Order to the Supreme Court of Delaware. The Delaware Supreme Court dismissed the appeal on the grounds that the Contempt Order was an interlocutory order⁹ and Debtor had failed to comply with Delaware Supreme Court Rule 42 which sets forth the procedure and requirements for appeals from interlocutory orders. See Merritt v. R & R Capital, LLC, 5 A.3d 631, 2010 WL 3688765, at *1 (Del. Sept. 22, 2010) (table, text in Westlaw).

On or about January 10, 2011, Heyman filed a receiver's motion to dismiss in the Chancery Court. Complaint ¶ 40. On February 21, 2011, the Chancery Court granted the motion. R & R Capital LLC v. Merritt, 2013 WL 1008593, at *8 (Del. Ch. March 15, 2013).

On March 23, 2011, Merritt filed an appeal from the Chancery Court's final order to the Delaware Supreme Court. Id. Debtor argued, inter alia, that the Chancery Court: (i) erred by granting summary judgment in R & R's favor and removing her as the Managing Member of the Entities; and (ii) abused its discretion in entering a contempt order and issuing sanctions against her. See Merritt v. R & R Capital, LLC, 2011 WL 2835704 (Del. June 30, 2011) (Appellant's Opening Brief on appeal to...