Rush v. Meininger
| Docket Number | 8:22-cv-1073-CEH |
| Decision Date | 24 July 2023 |
| Parties | PAULA RUSH, Appellant, v. STEPHEN L. MEININGER and GENOVESE JOBLOVE & BATTISTA, P.A., Appellees. |
| Court | U.S. District Court — Middle District of Florida |
Appellant Paula Rush appeals the bankruptcy court's Order Denying Corrective Motion for Rehearing Regarding Motion for Leave to File Separate Legal Action (Doc. 2-255), entered on April 26 2022. In the Order, the bankruptcy court denied Appellant's motion for leave to sue Appellee Stephen Meininger, the Chapter 7 Trustee of the underlying bankruptcy proceeding, and Appellee Genovese Joblove & Battista P.A., the Trustee's counsel. Appellant timely appealed (Doc. 2-256).
Appellant has filed her initial brief (Doc. 8), and Appellees have filed their response brief (Doc. 11). The Court heard oral argument on July 21, 2023.
Upon due consideration of the record, the parties' submissions, oral argument and otherwise being fully advised in the premises, the Court concludes that the appeal must be dismissed due to lack of standing.
In 2019, a corporation named Bruno One, Inc. (“the Debtor”) filed a Chapter 11 bankruptcy petition. Appellant Paula Rush held ten percent of Bruno One, while the remaining ninety percent was held by Caruso Ivan. Doc. 2-13 at 13.[1] Ivan and Rush were parties-in-interest in the bankruptcy case, which was subsequently converted to a Chapter 7 proceeding. Doc. 2-15.[2] The court appointed Stephen Meininger as the Chapter 7 Trustee (“the Trustee”), who employed Genovese, Joblove, & Battista, P.A. (“GJB”) as his counsel. Doc. 11 at 8.
Bruno One's bankruptcy was necessitated by foreclosure actions that Residential Mortgage Loan Trust I (“RMLT”) filed against it in state court. In those proceedings, Bruno One argued that RMLT lacked standing because it does not exist as a valid legal entity that can sue in Florida courts, and it is not the beneficiary named in the note endorsements. See Doc. 2-210 at 2-3. The argument was not successful, but counterclaims and at least one appeal of an unfavorable judgment remained pending at the time of the bankruptcy proceedings. Id. at 5, 113-207 (discussing status of state court litigation during hearing on February 25, 2021); 139-170 (same, during hearing on April 16, 2020).
RMLT identified itself as the primary secured creditor in the bankruptcy case, asserting that the Debtor owed it more than three million dollars. Doc. 2-197. The Debtor contended that RMLT could not be a creditor in the bankruptcy because it was not a valid legal entity, but the Trustee declined to challenge RMLT's status on behalf of the estate. Doc. 2-210 at 6-7. However, in response to a bankruptcy court order, see Doc. 2-173 at 2, RMLT turned over a W-9 form and a Trust Agreement to GJB to view in confidence. Doc. 11 at 9-10. The Trustee represented to the court that the documents, which included a tax identification number, sufficiently established that RMLT was the owner and holder of the loan documents. Doc. 3 at 9-10. The bankruptcy court denied the Debtor's motion to compel the Trustee to produce the documents to the Debtor, Ivan, or Rush. Docs. 2-190, 2-194, 2-198 at 17-18, 23-25. The court also stated it would not adjudicate any state court foreclosure issues in the bankruptcy proceeding. Id. at 8; see also Doc. 2-210 at 157.
During the bankruptcy proceedings, the bankruptcy court made findings, “more than once, that there is no equity in this estate that would flow to the equity interest holders for the Debtor.” Doc. 2-209 at 7; see also id. at 20-21 ( ).
The bankruptcy case resolved in a bulk sale in which the Debtor's assets were liquidated by selling its 24 properties to a single buyer, for a total price of $3,667,700. Doc. 2-192 at 5. RMLT was paid $2,305,000 for its 19 properties, in addition to another $94,400 that was held in trust to determine the priority of a competing mortgage lien. Id. at 8. The proceeds from the remaining four properties were given to a second secured creditor. Id. at 5. In addition, the sale order granted the real estate broker a fee of 3.5%, and the Trustee a fee of 11%. Id. The sale order also directed that remaining funds, if any, would be paid to a homeowners association that held a claim against one of the properties. Id. at 8. With respect to the Trustee's fee, GJB stated that it had spent more than $600,000 on the case, but it agreed to accept only $300,000 in payment. Doc. 14-3; see also Doc. 3 at 7, 14-15.
The bankruptcy court's sale order stated that RMLT's mortgage liens were “all valid and enforceable by RMLT,” and that there was no equity in the 20 properties secured by RMLT's mortgage liens above the amounts due under the liens. Doc. 2192 at 6. The order further noted that RMLT agreed to receive “an amount significantly less than the total amount due RMLT[] in consideration for, among other things, the termination of all existing litigation and issues raised therein filed in state and federal court, including this court.” Doc. 2-192 at 1. Ivan was not a party to the latter agreement, as he still intended to pursue attorney's fees in state court. See Doc. 2-209 at 14-16. However, RMLT constructively eliminated the outstanding state court claims by dismissing the foreclosure cases it had filed and vacating the underlying judgments for the pending appeals. Doc. 11 at 12. No party appealed the sale order, although Ivan unsuccessfully moved to stay the payment to RMLT pending a determination of its legal status. See Doc. 2-199; Doc. 2-209 at 19-20.[3]
On February 8, 2022, Appellant Rush filed a Motion for Leave to File Separate Legal Action Against Chapter 7 Trustee Stephen Meininger and Genovese Joblove & Battista, P.A. (“Motion for Leave”). Doc. 2-210. The motion charged Appellees GJB and the Trustee with neglecting their duty to investigate RMLT's legal status, and concealing and misrepresenting the nature of the RMLT documents they reviewed, which Rush asserted demonstrated RMLT's invalidity. Id. at 3-4. Rush alleged that the misconduct of GJB and the Trustee caused the court to authorize disbursement of funds to a nonexistent legal entity, which caused a loss of equity in the estate. Id. at 11, 23.
Appellees opposed the Motion for Leave. Doc. 2-215. They argued that their actions in reviewing and keeping confidential the RMLT documents were in accord with the bankruptcy court's orders. Id. at 6-7. They also contended they acted in good faith and performed due diligence in determining RMLT's entitlement to the sale proceeds. Id. at 6. Further, Appellees asserted that Rush did not meet her burden of proving a basis for her claim that overcame the Trustee's quasi-judicial immunity. Id. at 7-8.
The bankruptcy court initially denied the Motion for Leave after a hearing at which Rush was not present. Doc. 2-216.[4] Rush then filed a motion for rehearing to explain her absence, and the merits of both motions were discussed at a hearing on April 25, 2022. Docs. 2-223, 3. At the hearing, Rush clarified that she did not object to the sale of the properties, but, rather, the fact that Doc. 3 at 27-28.
The bankruptcy court questioned Rush's standing to sue the Trustee, asking her to explain how any money would “trickle down” to her as an equity holder, given that the creditor body and the administrative expenses were not paid in full. Id. at 5-7. Rush responded that RMLT's actions had caused a substantial loss in the properties' equity, in which she owned a ten percent stake. Id. at 8, 12, 20, 22. Moreover, she explained her belief that if “the creditors that were legitimate [had] been paid, there would have been extra money that would have returned to equity.” Id. at 7. The bankruptcy court stated that someone would need to be paid on the Debtor's loans, whether it was RMLT or another entity, and the court could not see a way that the money would trickle down to equity. Id. at 11-12, 14-15, 9, 20, 25, 27-29. Citing In re Abdo, 848 Fed.Appx. 877 (11th Cir. 2021), the court found that Rush lacked standing because she was not a “person aggrieved,” as an equity holder with no surplus. Doc. 3 at 16-19. Further, the court explained that a Chapter 7 trustee's role is “to sell assets for whatever the value is that they can get in their business judgment on the date of the sale,” and that settlements are favored in bankruptcy; the Trustee applied its business judgment to find that it was better to resolve the case than to pursue the RMLT argument. Id. at 21, 25, 28, 30.
Rush now appeals the denial of her motion for leave. Doc. 8. She argues that the actions of the Trustee and GJB constituted fraud on the court and a breach of their fiduciary duty. Id. at 11, 17, 49-50. These actions caused her harm because of the loss of equity that she suffered and because of the possibility of prevailing party damages under the fee-shifting statute. Id. at 6, 10, 23-24, 50. Further, she asserts that it was error for the bankruptcy court to deny her an evidentiary hearing and fail to decide her motion on the merits. Id. at 19.
In response, Appellees argue that Rush lacks standing to sue them under the “person aggrieved” standard or the constitutional standard. Doc. 11 at 19-23. In any event, they assert...
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