Sommers v. Fitzhenry (In re AFGO Dev. Co.)

• Citation: 625 B.R. 324
• Decision Date: 11 December 2020
• Docket Number: Adversary No. 20-3003,Case No: 19-35506
• Parties: IN RE: AFGO DEVELOPMENT COMPANY, INC., Debtor. Ronald J Sommers, Plaintiff, v. Mitchell Fitzhenry, Defendant.
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Southern District of Texas

625 B.R. 324

IN RE: AFGO DEVELOPMENT COMPANY, INC., Debtor.

Ronald J Sommers, Plaintiff,

v.Mitchell Fitzhenry, Defendant.

Case No: 19-35506

Adversary No. 20-3003

United States Bankruptcy Court, S.D. Texas, Houston Division.

Signed December 11, 2020

Reese W. Baker, Baker & Associates, Houston, TX, for Debtor.

MEMORANDUM OPINION

Marvin Isgur, United States Bankruptcy Judge Trustee, Ronald Sommers, and Defendant, Mitchell Fitzhenry,¹ disagree over the validity of a purported lien claimed by Mr. Fitzhenry. This "lien" burdens property once owned by the Debtor, AFGO Development Company.² The Trustee instituted this adversary proceeding seeking a declaration that Mr. Fitzhenry's lien is invalid, as well as damages under Texas's fraudulent lien statute. This Memorandum Opinion resolves Mr. Fitzhenry's Motion to Dismiss and the parties' cross-motions for summary judgment.

Mr. Fitzhenry's Motion to Dismiss, which asserts that the Trustee lacks standing to bring this adversary proceed, is without merit. This Court has already determined that the Wunderlich Property is property of the estate to which the Trustee is a successor-in-interest. Based on that determination, the Trustee has standing to seek a declaratory judgment regarding the validity of Mr. Fitzhenry's "lien." Likewise, Mr. Fitzhenry's contention that he holds a valid lien on the Wunderlich Property is incorrect. The circumstances surrounding the origination of Mr. Fitzhenry's "lien" do not give rise to any of the three types of liens recognized by Texas law. Finally, the Trustee failed to adequately support his request for summary judgment on the fraudulent lien claim. That is, the Trustee did not present evidence sufficient to entitle the Trustee to a judgment as a matter of law that Mr. Fitzhenry is liable for filing a fraudulent lien.

Mr. Fitzhenry's Motion to Dismiss is Denied. The Trustee's Motion for Summary Judgment is Granted in part and Denied in part. Mr. Fitzhenry's Motion for Summary Judgment is Denied.

BACKGROUND

This adversary proceeding centers on a Notice of Lien Mr. Fitzhenry filed in the Harris County Records of Real Property. (ECF No. 1 at 3–4).³ This Notice of Lien purports to evidence a lien held by Mr. Fitzhenry on two properties—the Louetta Property⁴ and the Wunderlich Property. (ECF No. 1-1 at 1). It is the validity of the purported lien on the Wunderlich Property challenged by the Trustee here. This "lien" arose from a lending agreement between Mr. Fitzhenry and the Debtor's president, Travis Hudson. (ECF No. 1 at 4–5).⁵

The Loan Underlying the Purported Lien

Just over a year before the Debtor sought chapter 11 relief, Mr. Fitzhenry's personal banker asked Mr. Fitzhenry if he would be interested in giving Travis Hudson a $100,000 loan. (ECF No. 17-8 at 10). This loan was meant to finance closing costs associated with real property developed by Oakview Farms LLC ("Oakview")—the Oakview property. (ECF No. 17-8 at 10). Mr. Fitzhenry advanced $100,000 to Oakview pursuant to a promissory note dated June 15, 2018. (ECF No. 17-8 at 13–15). This loan was personally guaranteed by Mr. Hudson. (ECF No. 17-8 at 16). No deed of trust was executed securing repayment of the loan.

Two months later, Mr. Fitzhenry was again asked to loan Oakview $100,000. (ECF 17-8 at 10). This time, the loan was intended to prevent the Oakview property from going into foreclosure. (ECF No. 17-8 at 10).⁶ Mr. Fitzhenry agreed and, in the end, loaned Oakview an additional $103,500. (ECF No. 17-8 at 10). In total, Mr. Fitzhenry loaned Oakview $203,500 (collectively, "the Loan"). (ECF No. 17-8 at 10). The Loan was memorialized by a promissory note ("the Note"), dated August 6, 2018. (ECF No. 17-7 at 9–11). Multiple documents supplemented the Note, but no deed of trust securing repayment of the Note was executed.⁷ Like the initial advance, Mr. Hudson personally guaranteed the Loan and pledged that Texas Mortgage would also guarantee the Loan. (ECF No. 17-7 at 14).⁸

The relevant terms of repayment included:

• The principal amount of $203,500 was to be paid back along with any interest, which accrued at a rate of 5%. (ECF No. 17-7 at 7).

• The Note was to come due on September 4, 2018. (ECF No. 17-7 at 7).

• Repayment of the Loan would be funded by: (i) "10% of the equity from the [sale of] the [Oakview] property;" or (ii) "if the Oakview property [did] not sell ... [then] out of the closing on Louetta, or out of any loan taken on the Oakview property." (ECF No. 17-7 at 10).

• Repayment was guaranteed by Travis Hudson, personally, and by Texas Mortgage. (ECF No. 17-7 at 14).

The Loan was never repaid.

In March 2019, Mr. Hudson informed Mr. Fitzhenry that the profits from the sale of any property would have to be used to pay down other debt. (ECF No. 17-7 at 15).⁹ Mr. Hudson told Mr. Fitzhenry that the best repayment he could offer was to convert the Loan into an "investment" in Mr. Hudson's development projects. (ECF No. 17-7 at 15). None of the Loan documents expressly grant Mr. Fitzhenry a lien on the Wunderlich Property.

The "Lien" and the Wunderlich Property

Despite not having explicit written authorization, Mr. Fitzhenry filed a Notice of Lien on the Louetta and Wunderlich properties in Harris County on January 4, 2019. (ECF No. 1-1 at 1). The Notice of Lien was not executed by the owner of the property. Five months later, a Texas state court declared Mr. Fitzhenry's "lien" on the Louetta Property invalid. (ECF No. 17-5 at 2–3). However, it was not until December 2019—almost a year after the Notice of Lien was filed—that Mr. Fitzhenry's "lien" on the Wunderlich property was challenged. (ECF No. 17-2 at 2).

Meanwhile, the Wunderlich Property was itself the subject of another dispute. Shortly after the Debtor filed bankruptcy, Capital Bank¹⁰ sought relief from the stay so it could foreclose on the Wunderlich Property. (Case No. 19-35506, ECF No. 7 at 1–6). Capital alleged that Texas Mortgage transferred the Wunderlich Property to the Debtor about a week before the Debtor filed petition. (Case No. 19-35506, ECF No. 7 at 5). This transfer, Capital alleged, was fraudulent. (Case No. 19-35506, ECF No. 7 at 3–4).

The Court entered an interim order granting Capital's relief from stay motion, which authorized Capital to post the Wunderlich Property for sale. (Case No. 19-35506, ECF No. 10 at 1). Shortly after entry of the interim order and a hearing, the Court entered another order appointing a chapter 11 trustee and authorizing Capital to take all preparatory steps necessary to sell the Wunderlich Property. (Case No. 19-35506, ECF No. 38 at 1). On December 27, 2019, the Court authorized the sale of the Wunderlich Property and ordered that any interest held by Mr. Fitzhenry in the Wunderlich Property would attach to the proceeds of the sale. (Case No. 19-35506, ECF No. 72 at 3). In this order, the Court found that the Wunderlich Property was property of the estate under 11 U.S.C. § 541. (Case No. 19-35506, ECF No. 72 at 2). A week after entry of the sale order, the Wunderlich sale closed. (Case No. 19-35506, ECF No. 73 at 1). The Court never ruled on whether the transfer of the Wunderlich Property to the Debtor was fraudulent.

The Trustee's Adversary Proceeding

The Trustee instituted this adversary proceeding after the Wunderlich sale closed. (ECF No. 1 at 2). The Trustee sought: (i) a declaration that Mr. Fitzhenry's "lien" on the Wunderlich Property was invalid; (ii) if the "lien" was valid, avoidance of the "lien" under 11 U.S.C. § 544(a)(3) because the Notice of Lien did not provide actual or constructive notice to a state-law bona fide purchaser; (iii) damages, as well as costs and attorneys' fees, under Texas's fraudulent lien statute, Tex. Civ. Prac. & Rem. Code Ann. § 12.002 (West 2019) ; and (4) in the alternative, a surcharge against Mr. Fitzhenry's "lien" under 11 U.S.C. § 506(c). (ECF No. 1 at 5–7).

Mr. Fitzhenry filed an answer to the Trustee's adversary complaint. (See ECF No. 11). Answering the lien validity claim, Mr. Fitzhenry alleged that he could establish the existence of an express agreement by which Mr. Hudson intended to grant Mr. Fitzhenry a lien on the Wunderlich Property to secure repayment of the Loan. (ECF No. 11 at 16). Mr. Fitzhenry also alleged that the "lien" could not be avoided under § 544(a)(3) because the Notice of Lien he filed gave the Trustee notice of the lien. (ECF No. 11 at 18). In response to the fraudulent lien claim, Mr. Fitzhenry alleged that his "lien" was not fraudulent because he had a "valid oral contract" authorizing the lien on the Wunderlich Property. (ECF No. 11 at 19). Mr. Fitzhenry also alleged that he did not file the Notice of Lien to gain leverage over Mr. Hudson or the Debtor, instead Mr. Fitzhenry sought financial protection. (ECF No. 11 at 19).¹¹

Shortly after answering the Trustee's complaint, Mr. Fitzhenry moved to dismiss the complaint. (See ECF No. 13). Essentially, Mr. Fitzhenry's motion asserted that the Trustee lacked statutory standing to bring this action because the Debtor never acquired title to Wunderlich. (ECF Nos. 13 at 5; April 27, 2020 Hearing at 1:30:00–1:42:50). According to Mr. Fitzhenry, title was never acquired because the transfer of Wunderlich to the Debtor was fraudulent. (ECF No. 13 at 5). The Court took Mr. Fitzhenry's Motion to Dismiss under advisement. (April 27, 2020, Courtroom Minutes).¹²

The parties filed cross-motions for summary judgment. The Trustee moved for summary judgment on his lien validity and fraudulent lien claims. (ECF No. 17 at 7–12). In support of his motion on the lien validity claim, the Trustee asserted: (i) that Mr. Fitzhenry was not provided a written agreement or instrument granting a security interest in the Wunderlich Property, thereby preventing Mr. Fitzhenry from holding a valid lien on Wunderlich; (ii) that there was no basis to grant Mr. Fitzhenry an equitable lien on Wunderlich; and (iii) that the guarantees made by Mr. Hudson and Texas Mortgage did not implicitly grant Mr....