PS Funding, Inc. v. Three Sisters Capital Partners, LLC (In re Shaw 3rd Holdings, LLC)

• Docket Number: 20-00467-ELG,Adv. Pro. 21-10010-ELG
• Decision Date: 02 February 2024
• Parties: In re: Shaw 3rd Holdings, LLC. Debtor. v. Three Sisters Capital Partners, LLC, et al., Defendants. PS Funding, Inc., Plaintiff,
• Court: United States Bankruptcy Courts – District of Columbia Circuit

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In re: Shaw 3rd Holdings, LLC. Debtor.

PS Funding, Inc., Plaintiff, v. Three Sisters Capital Partners, LLC, et al., Defendants.

No. 20-00467-ELG

Adv. Pro. No. 21-10010-ELG

United States Bankruptcy Court, District of Columbia

February 2, 2024

Chapter 11

MEMORANDUM OPINION

ELIZABETH L. GUNN, U.S. BANKRUPTCY JUDGE.

Plaintiff PS Funding, Inc. ("PS Funding") filed this action seeking a determination as to the priority of two liens on a former asset of the bankruptcy estate of Shaw 3rd Holdings LLC (the "Debtor"), real property located at 1901 3rd Street, NW, Washington, D.C. 20020 (the "Property"), that was sold pursuant to 11 U.S.C § 363(f)^[1] in the related chapter 11 proceeding. Upon consent of the parties to this case, the liens on the Property as of the date of the sale attached to the proceeds in the same priority as existed immediately prior to closing. Following the sale, the net proceeds (the "Net Sale Proceeds") from the Property were paid into the Court's registry pending resolution of this adversary proceeding. Main Case, Am. to Corrected Order Approving Debtor in Possession's Mot. to Sell Real Property, ECF No. 82.^[2] On July 27, 2023, the Court held a bench trial (the "Trial") in this case and took the matter under advisement. Upon consideration of the pleadings, the evidence, the applicable case law, and the arguments presented at Trial, the Court concludes that PS Funding is entitled equitable subrogation to the liens of JM1 and Tucker Family (as defined herein), and therefore holds a first priority lien on the Net Sale Proceeds in the amount of $1,568,000 plus 8.5 percent interest from February 28, 2019 through May 18, 2022, a second priority lien in the amount of $428,000, both senior to Three Sisters Capital Partners, LLC ("Three Sisters"). The balance of PS Funding's claim holds a fourth priority position. This Memorandum Opinion sets forth the Court's findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052.

I. Jurisdiction

This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(K). Venue is proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409. Findings of fact shall be construed as conclusions of law and conclusions of law shall be construed as findings of fact where appropriate. See Fed. R. Bankr. P. 7052.

II. Background

a. Liens

The Debtor was a single purpose entity formed prior to purchasing the Property on or about October 1, 2015. The managing members of the Debtor were Napoleon Ibiezugbe and Kevin Falkner. On or about January 16, 2016, the Debtor obtained a refinance mortgage on the Property (the "JM1 Note")^[3] from JM1 Investments, LLC ("JM1") in the original principal amount of $1,400,000 secured by a deed of trust recorded on January 22, 2016 (the "JM1 DOT," together with the JM1 Note, the "JM1 Loan"). AP, Ex. 2, ECF No. 73-2. The JM1 Note had a contractual rate of interest of 12 percent, with a default rate of 24 percent.

On May 10, 2016, the Debtor obtained a loan (the "Tucker Note") from Tucker Family, LLC ("Tucker Family") in the amount of $400,000 secured by a deed of trust recorded May 19, 2016 (the "Tucker DOT," together with the Tucker Note, the "Tucker Loan"). AP, Ex 4, ECF No. 73-4. Lawrence Tucker, Esq. ("Mr. Tucker") was the managing member of Tucker Family. Through his firm of Tucker & Associates PLLC, Mr. Tucker prepared the Tucker Note and Tucker DOT, is named as trustee in the Tucker DOT, and served as the closing attorney through Premium Title and Escrow ("Premium Title") for the Tucker Loan. Thus, Mr. Tucker clearly had extensive first-hand knowledge of the Tucker Loan.

On July 23, 2018, the Debtor obtained a loan (the "Three Sisters Note") from Three Sisters in the amount of $300,000 secured by a deed of trust recorded on September 6, 2018 (the "Three Sisters DOT," together with the Three Sisters Note, the "Three Sisters Loan"). AP, Ex. R, ECF No. 71. The Three Sisters Note and Three Sisters DOT were also prepared by Mr. Tucker, who served as the closing attorney through Premium Title for the Three Sisters Loan and is named as trustee in the Three Sisters DOT. Despite Mr. Tucker's involvement and direct knowledge of the Tucker Loan, he did not advise Three Sisters of the Tucker Loan, and as a result, Three Sisters believed it would hold a second position on the Property upon the closing of the Three Sisters Loan.

On February 28, 2019, the Debtor obtained replacement financing to satisfy the JM1 Loan and Tucker Loan through a loan (the "BCJCL Note") from BCJCL, LLC ("BCJCL") in the amount of $2,122,500, secured by a deed of trust recorded on March 6, 2019 as instrument number 2019022225 (the "BCJCL DOT," together with the BCJCL Note, the "Replacement Transaction"). AP, Exs. 7, 8, ECF Nos. 73-7, 73-8. The BCJCL Note includes contractual interest at the rate of 8.5 percent, with a default rate of 13.5 percent. AP, Ex. 8, ECF No. 73-8. Immediately after closing on February 28, 2019, the BCJCL Note and BCJCL DOT (the "PS Funding DOT," together with the PS Funding Assignment, the "PS Funding Loan") were assigned (the "PS Funding Assignment") to PS Funding and recorded on March 6, 2019 immediately after the BCJCL DOT as instrument number 2019022226. AP, Ex. 11, ECF No. 73-11. As indicated on the Settlement Statement accompanying the Replacement Transaction, JM1 received $1,568,000 and Tucker & Associates, PLLC^[4] received $428,000 at closing from the proceeds of the Replacement Transaction. AP, Ex. 10, ECF No. 73-10. In addition, the Debtor obtained $64,987.18 in cash at closing despite the existence of the Three Sisters Loan. Id. At the time of the Replacement Transaction in 2019, Three Sisters was requested to provide a payoff statement, but did not receive any further information about or funds out of the Replacement Transaction.^[5] Premium Title, as issuing agent for Chicago Title Insurance Company, was engaged as the settlement agent for the Replacement Transaction. As part of the transaction, BCJCL issued a closing instruction letter to Premium Title dated February 28, 2019 (the "Closing Instruction Letter"). Section C of the Closing Instruction Letter set forth the conditions upon which Premium Title was authorized to complete the Replacement Transaction. Section C.4 of the Closing Instruction Letter required Premium Title to confirm "that all liens and encumbrances, including any existing encumbrances, open taxes, open assessments, mortgages and/or deeds of trust recorded against the Property are either cleared prior to closing or will be paid through the closing of escrow." AP, Ex. 9 at 2, ECF No. 73-9. Additionally, section C.5 specifically stated that after completion of the Replacement Transaction, BCJCL shall have a first priority position on the Property. Id. The Closing Instruction Letter clearly stated that if Premium Title was "unable to comply with [the] instructions," then it was "not to proceed [to closing] without further authorization." Id. at 4. Through Ms. Shannon, a Title and Escrow Officer, Premium Title acknowledged the receipt of the Closing Instruction Letter and the requirement for strict compliance with the terms thereof. Id. at 5. Despite the requirement for the Replacement Transaction to result in a first priority lien position, Three Sisters never agreed or otherwise subordinated its lien to either the BCJCL DOT or PS Funding DOT.

On March 12, 2019, shortly after the closing of the Replacement Transaction, a certificate of satisfaction of the Tucker DOT was recorded (the "Tucker COS"). The Tucker COS was prepared and signed by Lawrence Tucker as Managing Member. AP, Ex. I, ECF No. 71. However, it took more than six months for a certificate of satisfaction of the JM1 DOT to be recorded. Nevertheless, a certificate of satisfaction of the JM1 DOT dated August 19, 2019 was recorded on October 29, 2019. AP, Ex. J, ECF No. 71. Therefore, at all relevant times up through the sale of the Property, the land records of the District of Columbia reflected two deeds of trust of record: (i) the September 18, 2018 Three Sisters DOT in first record position; and (ii) the March 6, 2019 PS Funding DOT in second record position.

b. The Underlying Bankruptcy Case

In default on its obligations to Three Sisters and PS Funding and facing an imminent foreclosure sale, the Debtor filed a voluntary chapter 7 petition on December 2, 2020. Main Case, Chapter 7 Vol. Pet., ECF No. 1. Less than one month later the Debtor filed a motion to convert its case to one under chapter 11, which the Court granted on February 24, 2021. Main Case, Mot. to Convert Case from Ch. 7 to 11, ECF No. 7; Main Case, Order Granting Mot. to Convert, ECF No. 10. PS Funding filed a claim in the Debtor's case asserting a prepetition balance due of $2,538,226.83. Main Case, Proof of Claim 1 (Claim of PS Funding). Three Sisters did not file a proof of claim but was scheduled by the Debtor with a claim of $200,000. Main Case, Sched. D at 11, ECF No. 1.

During the course of the chapter 11 case, the Debtor marketed the Property for sale, ultimately obtaining a purchase price of $2,500,000.00. Main Case, Debtor in Possession's Mot Sell Real Property at 3, ECF No. 44. In the Debtor's motion seeking approval of the sale of the Property, the Debtor listed the following approximate balances on the secured obligations: PS Funding - $2,903,3569.00, and Three Sisters - $313,889.36. Id. at 2. The Court does not need to reach question of whether either set of numbers was accurate; it is sufficient to note that in either case the proposed purchase price was less than the combined outstanding balances due to PS Funding and Three Sisters. Both PS Funding and Three Sisters consented...