Seitz v. Mccauley (In re Marchese)

Decision Date24 June 2019
Docket NumberBky. No. 16-13810 ELF,Adv. No. 17-0189
Citation605 B.R. 676
Parties IN RE: David C. MARCHESE, Debtor. Gary F. Seitz, Chapter 7 Trustee, Plaintiff, v. James McCauley, McCauley Associates Limited Partnership, Gerald Mullaney, Hopwood Farms LLC, nominal defendant, Defendants.
CourtU.S. Bankruptcy Court — Eastern District of Pennsylvania

Robert J. Birch, Robert J. Birch, Esquire, Blue Bell, PA, for Plaintiff.

Jeffrey S. Cianciulli, Walter Weir, Jr., Weir & Partners LLP, Philadelphia, PA, for Defendants.




In this adversary proceeding, Gary F. Seitz, the chapter 7 trustee ("the Trustee") of the bankruptcy estate of debtor David C. Marchese ("the Debtor"), asserts direct claims of the Debtor and derivative claims on behalf of the Debtor's real estate investment entity, Hopwood Farms LLC ("Hopwood") -- in both contract and tort -- against several of the Debtor's former business partners.

The Trustee alleges that Defendants Gerald Mullaney ("Mullaney"), James McCauley ("McCauley") and/or McCauley Associates Limited Partnership ("MALP"):

• breached their obligations under Hopwood's operating agreement ("the Operating Agreement"), including the covenant of good faith and fair dealing; and;
• violated their fiduciary duties as either members or managers of Hopwood.

Earlier in the litigation, on July 16, 2018, based on a motion to dismiss under Fed. R. Civ. P. 12(b)(6) (incorporated by Fed. R. Bankr. P. 7012 ) that was transformed into a motion for summary judgment, see Fed. R. Civ. P. 12(d), I dismissed the Trustee's tort claims against Mullaney (both direct and derivative) based on the expiration of the statute of limitations. See (Doc. #'s 56, 62).

Subsequently, Mullaney, McCauley and MALP (collectively "the Defendants") filed motions for summary judgment, seeking dismissal of the remaining claims. They raise defenses based on, inter alia, the statute of limitations, res judicata, the trustee's standing, and the Defendants' status as managers or members of Hopwood.

For the reasons discussed below, I will grant summary judgment to McCauley and MALP on all the Trustee's claims. The only surviving causes of action are the Trustee's contract claims against Mullaney (Counts I and III).


The Debtor filed this chapter 7 bankruptcy case on May 26, 2016.

On November 5, 2012, years before the bankruptcy, the Debtor, directly and derivatively on Hopwood's behalf, sued McCauley and MALP in Montgomery County ("the State Court Action"), alleging breaches of contract and fiduciary duties. The State Court Action was answered, then terminated for lack of prosecution, then reinstated under the Trustee's control in 2016. On July 3, 2017, the Trustee removed the State Court Action to this court, commencing the instant adversary proceeding.

On July 25, 2017, the Trustee amended the complaint, dropping all causes of action related to breaches and raising only avoidance causes of action drawn from the Bankruptcy Code. I dismissed this complaint on the motion of McCauley and MALP on November 28, 2017, but with leave to amend.

The Trustee filed the present amended complaint ("the Amended Complaint") on December 15, 2017. The Amended Complaint dropped all avoidance causes of action, resurrected the claims for contract and fiduciary breach, and added Mullaney as a new defendant.

The Defendants filed another motion to dismiss on January 19, 2018.

I resolved the January 19, 2018 motion to dismiss in an order accompanied by a Memorandum, ("the Prior Memorandum") in which I:

• dismissed the claim for the imposition of a constructive trust, (because that is a remedy rather than a cause of action);
• treated Mullaney's statute of limitations defense to the fiduciary breach claims as a motion for summary judgment; and • denied the remainder of the motion to dismiss.

In re Marchese, 2018 WL 3472823, at *17 (Bankr. E.D. Pa. July 16, 2018).

In treating Mullaney's statute of limitations defense as a motion for summary judgment under Fed. R. Civ. P. 56, I permitted the Trustee to submit additional evidence. He did so, but this evidence did not raise a material factual dispute. On August 20, 2018, I entered judgment in Mullaney's favor on the fiduciary breach claim (Count II). (Doc. #'s 60, 61, 62).

On January 10, 2019, two (2) summary judgment motions were filed. Mullaney filed one (1), solely on his own behalf. ("the Mullaney Motion") (Doc. # 79). The second motion was filed by all of the Defendants, including Mullaney ("the Defendants' Motion") (collectively "the Motions"). (Doc. # 81). The Trustee and Defendants have traded responses and replies, the last of which was filed on February 25, 2019. (Doc. #'s 86, 87, 88, 90).1

A. The Undisputed Facts

In my Prior Memorandum, I wove the facts alleged in the Amended Complaint into a narrative to streamline this recitation of this case. Most of those alleged facts – at least the material ones – are now undisputed and supported by the record.

1. Hopwood and the Foreclosure Action

In 2005, the Debtor, Mullaney, MALP (an entity in which McCauley is the principal), Mullaney's brother Martin, and Paul Newlin formed Hopwood in order to acquire and develop real estate. The Debtor owned a 50% interest in Hopwood. MALP, Mullaney, and the other two individuals each owned 12.5%. Mullaney was the manager of Hopwood.

The Debtor contributed $500,000 to fund Hopwood. Hopwood purchased 172 Hopwood Road ("the Property") for $1,900,000, applying members' initial contributions and financing the balance of the purchase price through a note ("the Note") and mortgage ("the Mortgage") in the amount of $1,235,000 granted to Harleysville National Bank. The loan was guaranteed by all Hopwood members except MALP and was secured by the Property. The Debtor paid the monthly mortgage payments, making a total of around $200,000 in payments, which were added to his capital account balance.

The members of Hopwood were to be compensated according to terms laid out in their Operating Agreement. If the investment made a profit, Hopwood would distribute money to members with an outstanding capital account balance. Once the capital contributions had been fully returned, additional profits would be allocated to the members according to their ownership interest. In effect, this meant that the Debtor would obtain 80% of the first million dollars in profits,2 and 50% of all profits thereafter.

In early 2011, the Hopwood members began to struggle to make payments on the Mortgage. Their efforts to pursue additional financing proved unsuccessful. Hopwood's members also discussed the possibility of buying the Mortgage from its holder, American Acquisitions, at a discount. On August 15, 2011, MALP purchased the Mortgage for $550,000.

On September 6, 2012, MALP, now a creditor of Hopwood, filed a foreclosure action against Hopwood ("the Foreclosure Action"). Mullaney accepted service of the foreclosure complaint but did not defend the foreclosure. The Debtor, purporting to act for Hopwood, filed an answer and new matter in the Foreclosure Action on October 26, 2012. By April of 2014, the Debtor's counsel in the Foreclosure Action was permitted to withdraw, and the Debtor did not file any more pleadings on behalf of Hopwood.

On June 15, 2014, the state court granted MALP summary judgment in the Foreclosure Action after Hopwood failed to defend against MALP's summary judgment motion. MALP executed on this judgment by scheduling a sheriff's sale of the Property. On April 26, 2015, MALP purchased the Property at sheriff's sale.

Meanwhile, in November 2012, while the Foreclosure Action was pending, the Debtor filed the State Court Action (later removed to this court), alleging that McCauley and/or MALP committed various business torts and contract breaches.

After the foreclosure sale, Hopwood had no assets and no likelihood of paying out the large capital account balance in favor of the Debtor. Also, after the foreclosure sale, MALP sent Mullaney a letter releasing Mullaney from his personal guarantee of the Mortgage.

2. the constructive trust in favor of the JDM Estate

While the events leading to the Hopwood foreclosure and sheriff's sale were underway, the Debtor was the target in a separate set of legal proceedings that impact this adversary proceeding.

The Debtor was the administrator of the Estate of Joseph D. Marchese ("the JDM Estate"). In March 2012, as a result of his misappropriation of funds of the JDM Estate (some of which the Debtor used to make his capital contribution to Hopwood), the state court determined that the Debtor should return $1,412,935.00 to the JDM Estate. In September 2012, the state court held the Debtor in contempt for failing to return the funds and removed him as the administrator of the JDM Estate. On November 5, 2014, the state court entered judgment against the Debtor in the amount of $1,766,318.34. On July 17, 2015, the state court imposed a constructive trust over all of the Debtor's assets (including his interest in Hopwood), retroactive to April 24, 2009, in favor of the JDM Estate.3

On January 28, 2015, in compliance with the order imposing the constructive trust, and to purge himself of civil contempt, the Debtor executed a document which purported to assign his 50% ownership interest in Hopwood to Gregory Phillips, the replacement administrator of the JDM Estate.

3. events in the bankruptcy case

The Debtor filed his chapter 7 case on May 26, 2016. On June 10, 2016, the JDM Estate moved for relief from the automatic stay, largely on the theory that the bankruptcy estate had no interest in any of the Debtor's assets as a result of the constructive trust established by the state court prior to the bankruptcy filing. I granted the motion on July 28, 2016.

After the stay relief order was entered, the Trustee and the JDM Estate executed a stipulation ("the Stipulation"), through which the JDM Estate authorized the Trustee to administer certain assets; in return, the JDM Estate...

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