Quinlan v. AFI Servs., LLC (In re Afi Servs., LLC)

• Decision Date: 07 February 2013
• Docket Number: Adversary No. 12–03303.,Bankruptcy No. 12–33338.
• Citation: 486 B.R. 827
• Court: U.S. Bankruptcy Court — Southern District of Texas
• Parties: In re AFI SERVICES, LLC, Debtor. John Quinlan, Plaintiff, v. AFI Services, LLC, James Fales, Okin & Kilmer, LLP, and Chris Adams, Defendants.

486 B.R. 827

In re AFI SERVICES, LLC, Debtor.John Quinlan, Plaintiff,

v.AFI Services, LLC, James Fales, Okin & Kilmer, LLP, and Chris Adams, Defendants.

Bankruptcy No. 12–33338.

Adversary No. 12–03303.

United States Bankruptcy Court,

S.D. Texas,

Houston Division.

Feb. 7, 2013.

Annie E. Catmull, Edward L. Rothberg, Hoover Slovacek LLP, Houston, TX, for Plaintiff.

Charles M.R. Vethan, The Vethan Law Firm, Christopher Adams, Okin Adams & Kilmer LLP, Eva S. Engelhart, Ross Banks May Cron and Cavin PC, Houston, TX, Lee Keller King, Sugar Land, TX, for Defendants.

MEMORANDUM OPINION REGARDING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT AND TRUSTEE'S COUNTER–MOTION FOR SUMMARY JUDGMENT

[Adv. Doc. Nos. 45 & 52]

JEFF BOHM, Chief Judge.

I. Introduction

In the instant adversary proceeding, Plaintiff John Quinlan (Quinlan) seeks the return of $1.0 million, which he placed into an escrow account (the Escrow Account) “on behalf of” Debtor AFI Services, LLC (the Debtor) after entering into a contractual agreement with the Debtor. Quinlan has filed a motion for partial summary judgment seeking: (1) a declaration that the bankruptcy estate has no interest in the $1.0 million; and (2) a return of these funds to him. The Chapter 7 Trustee, Eva S. Engelhart (the Trustee), ¹ opposes this motion and has, in turn, filed a counter-motion for summary judgment arguing that the $1.0 million is property of the Debtor's estate (the Counter–Motion).

This Court must determine whether the $1.0 million is property of the bankruptcy estate pursuant to 11 U.S.C. § 541. To analyze this issue, the Court must address the terms of a different contract—an Agreement of Purchase and Sale between Wells Fargo, N.A. and the Debtor (the PSA). The PSA established the Escrow Account, and though Quinlan was not a party to the PSA, by depositing the $1.0 million into the Escrow Account, the $1.0 million is governed by the PSA's terms.

Based upon the entire record, the Court now makes the following written Findings of Fact and Conclusions of Law pursuant to Fed.R.Civ.P. 52, as incorporated into adversary proceedings by Fed. R. Bankr.P. 7052. To the extent that any Finding of Fact is construed to be a Conclusion of Law, it is adopted as such. To the extent that any Conclusion of Law is construed to be a Finding of Fact, it is adopted as such. The Court reserves the right to make any additional Findings and Conclusions as may be necessary or as requested by any party.

For the reasons set forth herein, this Court concludes that the $1.0 million at issue is property of the Debtor's bankruptcy estate. Accordingly, Quinlan's Motion for Partial Summary Judgment is denied in its entirety, and the Counter–Motion is granted in its entirety.

II. Findings of Fact

1. On November 28, 2011, the Debtor, as purchaser, and Wells Fargo Bank, N.A., ² as seller (the Seller), entered into an Agreement of Purchase and Sale (the PSA) of the City View Apartments complex, comprising approximately 2,712 apartment units located in Houston, Texas (the Property). [Adv. Doc. No. 58, p. 2]; [Def.'s Ex. No. 10].

2. Section 32 of the PSA is entitled “Escrow Agreement,” and contains the following relevant terms:

A. The Title Company agrees to deposit the Earnest Money in an interest bearing account ... and to hold and disburse said funds, and any interest earned thereon, as hereinafter provided. Upon written notification from Seller or Purchaser in accordance with the terms of this Agreement, the Title Company shall release the funds in accordance with and pursuant to the written instructions. In the event of a dispute between any of the parties hereto sufficient in the sole discretion of the Title Company to justify its doing so, the Title Company shall be entitled to tender upon the registry or custody of any court of competent jurisdiction all money or property in its hands hold under the terms of this Agreement, together with such legal pleading as it deems appropriate, and thereupon as discharged.

[Def.'s Ex. No. 10, p. 20] (emphasis added). The PSA designates Stewart Title Company as the title company (the Title Company) [Def.'s Ex. No. 10, p. 2]. Mark LaRocca was the Commercial Escrow Officer (the Escrow Officer) in charge of the escrow account at the Title Company (the Escrow Agreement). [Adv. Doc. No. 58, p. 3].

3. Section 10 of the PSA, entitled “Notices,” lists five ways in which notice may be given by one party to another. [Def.'s Ex. No. 10, p. 13]. Specifically, notice may be given via: (1) hand delivery at the address set forth for that party in the PSA; (2) hand delivery at the closing; (3) U.S. mail, certified with return receipt requested, addressed to the party at the address set forth for that party in the PSA; (4) Federal Express Overnight Delivery or another reputable overnight carrier for next day delivery to the party at the address set forth for that party in the PSA; or (5) facsimile transmission to the party at the telecopy number set forth for that party in the PSA, provided that such transmission is confirmed by telephone on the date of such transmission. [Def.'s Ex. No. 10, p. 13]. Part B of Section 10 lists mailing addresses, telephone numbers, fax numbers, and e-mail addresses for the Seller and its attorney and the Debtor and its attorney. [ Id. at p. 13–14]. Although e-mail addresses are listed, the “Notices” section does not provide for notice by e-mail.

4. The PSA also includes a merger clause, which states that the PSA contains the entire agreement of the parties and prohibits modifications “unless set forth in a document executed by such parties or a duly authorized agent, officer or representative thereof.” [Def.'s Ex. No. 10, p. 14].

5. The Debtor terminated the PSA pursuant to a letter from the Debtor to the Seller dated December 28, 2011. See [Def.'s Ex. No. 15].

6. On December 29, 2011, the Debtor and the Seller entered into a Reinstatement and First Amendment to Agreement of Purchase and Sale (the First Amendment to the PSA), wherein the parties agreed, among other things, to reinstate the PSA and move the Scheduled Closing Date ³ to February 10, 2012. [Adv. Doc. No. 58, p. 2]; [Def.'s Ex. No. 15].

7. On January 6, 2012, the Debtor and the Seller entered into a Second Amendment to Agreement of Purchase and Sale (the Second Amendment to the PSA), wherein the parties agreed, among other things, to a reduction of the purchase price of the Property. [Adv. Doc. No. 58, p. 2]; [Def.'s Ex. No. 16].

8. On March 5, 2012, the Debtor and the Seller entered into a Third Amendment to Agreement of Purchase and Sale (the Third Amendment to the PSA). [Adv. Doc. No. 58, p. 2]; [Def.'s Ex. No. 17]. Prior to the execution of the Third Amendment, the Debtor had exercised its right pursuant to the PSA to extend the Scheduled Closing Date from February 10, 2012 to March 5, 2012, and had paid earnest money associated with exercising this right. [Def.'s Ex. No. 17, p. 1]. The Third Amendment to the PSA increased the purchase price and further extended the Scheduled Closing Date to April 30, 2012. [Adv. Doc. No. 58, p. 2]; [Def.'s Ex. No. 17, p. 2].

9. Thereafter, the Debtor and the Seller began negotiating for another extension of the Scheduled Closing Date, and drafted and circulated a Fourth Amendment to Agreement of Purchase and Sale (the Fourth Amendment to the PSA). [Pl.'s Ex. F, p. 4]. As consideration for the additional extension, the Debtor was to deposit an additional $1.0 million into the Escrow Account at the Title Company (i.e., in addition to any amounts which the Debtor had previously paid in connection with entering into the PSA and extending the Scheduled Closing Date). [ Id.]; see also [Def.'s Ex. No. 18] (referring to this payment as a $500,000 deposit for an initial 30 day extension and $500,000 for an additional 30 day extension). Although the Fourth Amendment to the PSA was circulated for execution by the parties it was never executed.

10. On April 27, 2012, Quinlan and James Fales (Fales), as “authorized signatory” on behalf of the Debtor, executed a document entitled “Summerlin Properties, LLC—Agreement to Enter into Joint Venture” (the JVA). [Adv. Doc. No. 58, p. 2]; [Pl.'s Ex. A]. The purpose of the JVA was “to establish the principal terms and conditions on and subject to which ... [the Debtor] and an entity controlled by [Quinlan] shall form a single purpose entity to acquire the Property.” [Adv. Doc. No. 52–3, p. 1]. The terms of the JVA provided that:

Contemporaneously with the execution of this Agreement, Quinlan shall wire transfer to Seller, on behalf of AFIS [i.e., the Debtor] $1,000,000 as contemplated by that certain Fourth Amendment to Agreement of Purchase and Sale to be entered into on the date hereof. AFIS [i.e., the Debtor] will form a single purpose entity, Summerlin Properties, LLC or other name approved by both parties (“Summerlin”) to acquire the Property. Upon the formation of Summerlin, AFIS [i.e., the Debtor] shall assign the Contract to Summerlin.

[ Id.]. No terms of the PSA were altered in connection with, or as a result of, the execution of the JVA.

11. Also on April 27, 2012, the Seller sent correspondence to the Debtor stating that it “is fully prepared and intends to close the Sale on April 30, and expects Purchaser [i.e., the Debtor] to close the Sale on April 30.” ⁴ [Adv. Doc. No. 58, p. 2]; [Adv. Doc. No. 1, p. 6–7]; [Adv. Doc. No. 41, p. 4, ¶ 33].

12. On April 30, 2012, at 10:25 a.m., Quinlan wire transferred $1.0 million to the Escrow Account at the Title Company. [Adv. Doc. No. 58, p. 3]. As discussed previously in Finding of Fact No. 2, the Escrow Account had been established by the Debtor and the Seller in the PSA, and was governed by the terms of the PSA. Quinlan's $1.0 million wire transfer was made “on behalf of AFIS” [i.e., the Debtor], but contained no further qualifications, limitations, restrictions, or reservations. [Adv. Doc. No. 52–3, p. 1].

13. On April 30, 2012, at 1:22 p.m., Andrew...