Tow v. Park Lake Cmtys., LP (In re Royce Homes, LP)

• Decision Date: 02 November 2017
• Docket Number: Case No. 09–32467,Adversary No. 17–03322
• Citation: 578 B.R. 748
• Parties: IN RE: ROYCE HOMES, LP, Debtor. Rodney Tow, Trustee, Plaintiff v. Park Lake Communities, LP, Defendant
• Court: U.S. Bankruptcy Court — Southern District of Texas

578 B.R. 748

IN RE: ROYCE HOMES, LP, Debtor.Rodney Tow, Trustee, Plaintiff

v.Park Lake Communities, LP, Defendant

Case No. 09–32467

Adversary No. 17–03322

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

Signed November 2, 2017

Erin E. Jones, Ostrom Morris PLLC, Christopher David Lindstrom, Cooper Scully P.C., Houston, TX, for Plaintiff.

Victoria A. Dessens, Michael J. Durrschmidt, Hirsch & Westheimer, P.C., Houston, TX, for Defendant.

REPORT AND RECOMMENDATION TO THE UNITED STATES DISTRICT COURT RECOMMENDING AGAINST WITHDRAWAL OF THE REFERENCE

[This Order Relates to Adv. Doc. No. 23]

Jeff Bohm, United States Bankruptcy Judge

I. INTRODUCTION

On August 1, 2017, Rodney Tow, the Chapter 7 trustee in the main case (the "Trustee"), initiated this adversary proceeding by filing an original complaint (the "Complaint") against Park Lake Communities, LP ("Park Lake"). [Adv. Doc. No. 1]. The Complaint asserts only one claim: the Trustee has sued Park Lake under 11 U.S.C. § 542(b)¹ requesting that this Court order Park Lake to pay down a debt of $4.5 million that it owes to the estate by remitting the proceeds to be generated from a certain receivable that Park Lake holds from the Montgomery County Municipal Utility District # 15 (the "MUD Reimbursement"). The MUD Reimbursement totals approximately $735,000.00. [Adv. Doc. No. 53].

Park Lake requests that this Court recommend to the District Court that the reference of this adversary proceeding be withdrawn. [Adv. Doc. No. 23]. The Trustee vigorously opposes this request. [Adv. Doc. No. 33]. On October 18, 2017, this Court held a hearing on this dispute, admitted exhibits, listened to argument from counsel for both parties, and then took the matter under advisement. Pursuant to Bankruptcy Local Rule 5011–1, this Court now issues this Report and Recommendation to the District Court recommending against withdrawal of the reference.

II. FACTUAL BACKGROUND ²

1. On February 2, 2004, Park Lake, a developer of subdivisions in the greater Houston area, entered into a pre-construction agreement with the Montgomery County Municipal Utility District # 15 ("MUD # 15"). [Park Lake Ex. No. 4]. This agreement related to Park Lake's development of a subdivision referred to as Gleneagles; among other things, this agreement entitled Park Lake to the MUD Reimbursement under certain conditions. [Id. ]. Under the terms of this agreement, it expired by no later than February 2, 2014. [Id. ].

2. On April 7, 2009, four creditors of Royce Homes LP (the "Debtor") filed a Chapter 7 involuntary petition against the Debtor. [Main Case No. 09–32467, Doc. No. 1]. On April 30, 2009, this Court entered the order for relief. [Main Case No. 09–32467, Doc. No. 11]. The Debtor was a homebuilder and, according to the Trustee, was the single largest purchaser of lots from Park Lake. [Adv. Doc. No. 1, p. 6 ¶ 21]. The Debtor ceased operations in July of 2008, and Park Lake, which depended almost entirely upon the Debtor for its revenues, also ceased its operations in this same year. [Id. at pp. 3 ¶ 9, 7 ¶ 23].

3. On April 30, 2009, the Trustee received his appointment in the main case to serve as trustee for the Debtor's estate. [Main Case No. 09–32467, minute entry on Apr. 30, 2009].

4. On July 7, 2009, this Court entered an order designating John Speer ("Speer") as the representative of the Debtor for purposes of its Chapter 7 case. [Main Case No. 09–32467, Doc. Nos. 74 & 75].

5. On July 28, 2009, Speer, as the Debtor's authorized representative, signed and filed the Debtor's schedules, including Schedule B. [Main Case No. 09–32467, Doc. No. 92]. In this Schedule B, Speer represented that the Debtor's total assets (excluding real estate) had a value of $867,883.61. [Id. at pp. 3–6]. There was no disclosure of any indebtedness owed by Park Lake to the Debtor on this Schedule B. [Seeid. ].

6. On August 28, 2009, Park Lake lost its charter pursuant to Section 171.309 of the Texas Tax Code. [Trustee Ex. No. 8].

7. On September 29, 2009, Speer, as the Debtor's authorized representative, signed and filed the Debtor's statement of financial affairs (the "SOFA"). [Main Case No. 09–32467, Doc. No. 125].

a. Item number 13 on the SOFA required the Debtor to list all setoffs made by any creditor against a debt owed to the Debtor within ninety days preceding the commencement of the Debtor's Chapter 7 case. Speer checked the "none" box, thereby representing that no creditor of the Debtor had made any setoff against an obligation owed by that creditor to the Debtor. [Id. at p. 6 of 53].

b. Item number 10 on the SOFA required the Debtor to list all property that the Debtor had transferred outside the ordinary course of its business, either absolutely or as security, within the two years immediately preceding the commencement of the Debtor's Chapter 7 case. [Id. at p. 5 of 53]. Speer attached several pages to the SOFA describing such transfers. However, Speer did not reference any transfer of the Debtor's interest in Park Lake that was made within the two years prior to the filing of the involuntary petition against the Debtor. [Id. ].

8. On March 8, 2011, the Trustee took the 2004 examination of Speer in the main case. [Trustee Ex. No. 3]; [Park Lake Ex. No. 14]. During this examination, Speer admitted that Park Lake owed the Debtor the sum of $4,495,869.31, representing unpaid advances that the Debtor had extended to Park Lake (the "Debt") during the time that both entities were operational and doing business with one another. [Trustee Ex. Nos. 3 & 7]. According to the Trustee, the Debt is a matured, unsecured obligation that was still owed on the date of the filing of the involuntary petition against the Debtor, and the Debt should have been scheduled as an asset of the Debtor's estate on the Schedule B that Speer filed on July 28, 2009. [Tape Recording, Oct. 18, 2017 Hearing at 10:53:05–10:53:20 A.M.]. Speer, as the authorized representative of the Debtor, has never filed an amended Schedule B disclosing the existence of the Debt.

9. On April 28, 2011, the Trustee initiated an adversary proceeding in this Court against numerous defendants, including Park Lake and Speer (the "Fraudulent Conveyance Suit"). [Adv. Proc. No. 11–03191, Adv. Doc. No. 1].

10. On October 13, 2011, the undersigned judge issued a report and recommendation to the District Court recommending that it withdraw the reference of the Fraudulent Conveyance Suit. [Adv. Proc. No. 11–03191, Adv. Doc. No. 201].

11. On October 26, 2011, the District Court withdrew the reference of the Fraudulent Conveyance Suit. [Civ. Act. No. 4:11–cv–03700, Doc. No. 11].

12. After the District Court withdrew the reference of the Fraudulent Conveyance Suit, the Trustee amended his complaint, and in his third amended complaint filed on August 20, 2012, he added a claim against Park Lake to recover the Debt. [Civ. Act. No. 4:11–cv–03700, Doc. No. 77, p. 183 of 606]. However, prior to trial of the Fraudulent Conveyance Suit, the Trustee dropped this particular claim out of the belief that Park Lake had no assets with which to pay the Debt, either in whole or in part. [Tape Recording, Oct. 12, 2017 Hearing at 2:13:04–2:14:05 P.M.].

13. The District Court held two jury trials on the claims brought by the Trustee in the Fraudulent Conveyance Suit, and on March 31, 2015, entered judgment against Speer in the amount of $12,129,006.90, plus court costs in the amount of $11,948.03. [Civ. Act. No. 4:11–cv–03700, Doc. No. 417].

14. After the District Court issued its judgment, the Trustee took post-judgment discovery by serving interrogatories upon Speer. Speer answered these interrogatories in May and July of 2015. One of these interrogatories required Speer to identify any ownership interest that he has in any entity. Speer disclosed that he had an interest in several entities, but he did not disclose that he had any interest in Park Lake. [Trustee Ex. Nos. 10 & 11]. Speer now takes the position that he does own an interest in Park Lake.

15. On August 18, 2015, all of the parties in the Fraudulent Conveyance Suit underwent mediation, and a settlement was reached. [Civ. Act. No. 4:11–cv–03700, Doc. No. 478, p. 3 ¶ 14].

16. On November 3, 2015, the District Court approved the compromise that the parties had negotiated in their mediation. [Civ. Act. No. 4:11–cv–03700, Doc. No. 480].

17. On January 28, 2016, as part of the documentation memorializing the compromise that the District Court had approved, the parties signed a "Full and Final Settlement Agreement and Release" (the "Release"). [Park Lake Ex. No. 1]; [Trustee Ex. No. 1]. In the Release, the Trustee released the Speer Group

and its present and former ... affiliates ... from any and all legal equitable claims, demands, accounts, debts, liabilities, causes of action, and damages, whether known, unknown, suspected, unsuspected, or claimed, now existing or which might have arisen on or prior to the Effective Date, relating to the State Lawsuit, the Federal Lawsuit, or any other undertaking, act, omission, relationship, or agreement or proposed agreement with or between the Trustee and the Speer Group arising on or prior to the Effective Date, in each case without regard to whether such claim was, is, or could have been asserted in the State or Federal Lawsuits.³

[Park Lake Ex. No. 1, p. 13 of 24] (emphasis and footnote added); [Trustee Ex. No. 1, p. 13 of 24] (emphasis and footnote added).

18. On June 1, 2016, Speer, in his capacity as CEO of Park Lake, received a letter from Joe Fogarty (in his capacity as "president corporate general partner" of 26 Gleneagles Limited) setting forth that the MUD # 15 had decided to pursue a bond issue, which in turn would generate payment of the MUD Reimbursement to Park Lake. [Park Lake Ex. No. 6].

19. On August 10, 2016, the MUD # 15 and Park Lake executed a document entitled "First Addendum to Pre–Construction Agreement" (the "Addendum"). [Park Lake Ex. No. 5]. The Addendum amended the pre-construction

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