Trust v. the Square At Falling Run LLC
| Decision Date | 25 April 2011 |
| Docket Number | CIVIL ACTION NO. 1:11CV31 |
| Court | U.S. District Court — Northern District of West Virginia |
| Parties | FIRST UNITED BANK & TRUST, Plaintiff, v. THE SQUARE AT FALLING RUN, LLC, a West Virginia Limited Liability Company, Defendant, CITY OF MORGANTOWN and MORGANTOWN BUILDING COMMISSION, Objectors. |
(Judge Keeley)
On March 18, 2011, the plaintiff, First United Bank & Trust ("First United"), filed this action against the defendant, The Square at Falling Run, LLC ("Falling Run"), alleging a breach of Falling Run's financial obligations related to the development of certain real estate in Morgantown, West Virginia. On March 22nd, First United filed an "Emergency Motion to Appoint Receiver," requesting a prompt hearing to protect its security interest in Falling Run's lease of property from the Morgantown Building Commission, a public corporation.
The Court referred this motion to the Honorable John S. Kaull,
United States Magistrate Judge ("Magistrate Judge Kaull"), who scheduled a hearing on the emergency motion for March 29th. Counsel for Falling Run noted a special appearance at the hearing, and also filed a "Motion to Dismiss for Lack of Jurisdiction." After taking evidence and testimony, and hearing argument from the attorneys, the Magistrate Judge issued a Report and Recommendation ("R&R") on March 31st recommending denial of Falling Run's motion to dismiss and the appointment of a receiver.
The R&R further recommended that Robert L. Johns, Esq. ("Johns"), who currently serves as the bankruptcy trustee for various entities sharing the same principals as Falling Run, as well as for one of those owner's personal bankruptcy estate, be appointed as the receiver. It also delineated the specific powers and obligations Johns would undertake should the Court appoint him as receiver. Following the issuance of the R&R, however, counsel for First United notified the Court that Johns had concluded a conflict of interest prevented him from serving as receiver. The parties have not proposed an alternative receiver.
Finally, the Magistrate Judge ordered First United to serve a copy of the R&R on the City of Morgantown and the Morgantown Building Commission (collectively, "Morgantown entities" or "City")no later than April 5th, and further ordered that any party objecting to the R&R do so by April 6th. Falling Run filed its objections on the day the R&R issued, March 31st, and the Morgantown entities filed objections to the R&R on April 7th.1
Following a de novo review of the specific objections of Falling Run and the City, for the reasons that follow, the Court ADOPTS the R&R except for the selection of Johns as receiver, DENIES Falling Run's motion to dismiss, and GRANTS-IN-PART First United's motion to appoint a receiver, subject to the identification of a receiver acceptable to the Court. See 28 U.S.C. § 636(b)(1). The Court again REFERS this case to Magistrate Judge Kaull for further proceedings consistent with this Order.
The following summary of the relevant facts in this case is drawn from the pleadings, exhibits and other filings of record, as well as the Court's judicial notice of the history of the property at issue. Falling Run was organized as a limited liability company under the laws of West Virginia with four brothers as members, Kristian, Benjamin, Andrew and Monroe Warner ("the Warners"). The Warners were or are also principals of various other companies, including Augusta Apartments, LLC, and McCoy 6 Apartments, LLC. For many years, the entities controlled by the Warners, as well as the Warners individually, owned and operated numerous rental properties in the Morgantown area, including several older houses in the area at issue in this case-a valley named for the stream flowing through it, Falling Run. This area is adjacent to the main campus of West Virginia University and the downtown area of Morgantown. The Warners primarily rented their properties in the Falling Run area to university students.
Wishing to develop the Falling Run area into a more modern, mixed-use zone, the City entered into a complicated plan with the Warners that envisioned the demolition of the Warners' rental properties and construction of numerous residential, commercial and retail facilities. In addition, the plan-which the City approved under a special zoning procedure known as Planned Unit Development ("PUD")-called for the construction of a major parking facility and the rerouting of certain public streets.
The first phase of the PUD allowed the Warners, through Augusta Apartments, LLC, to construct a pair of apartment buildingsknown as The Augusta on the Square. That project was completed.
The second phase of the project involved the construction of a major parking facility. To accomplish this undertaking, the Building Commission leased several parcels it owned in the area to Falling Run under a fifty-year lease agreement ("Ground Lease") that required Falling Run to construct a parking garage. Pursuant to the terms of the Ground Lease, the initial portion of the garage, known as the "Core Facility," was to be a 500-unit parking area to be completed by April 1, 2011. The Ground Lease specified that Falling Run's failure to construct the Core Facility by that date constituted an "Event of Default" that entitled the City to declare a default and initiate the process to extinguish Falling Run's leasehold interest.
Although the Warners completed the Augusta on the Square project, they encountered serious financial difficulty in the process. Thus, in December 2008, through Augusta Apartments and other entities they owned, the Warners obtained a $2.48 million line of credit from First United, which allowed them to pay off their debts to vendors and maintain their operations. Having already loaned the Warners substantially larger sums for their various business endeavors, First United required them to signpersonally as guarantors of the line of credit. Crucial to this litigation, Falling Run also became obligated as an additional guarantor. As part of Falling Run's guarantor arrangement, it pledged as security its leasehold interest in the City's property (the "Deed of Trust").
The cash infusion from the line of credit failed to save the Warner operations. McCoy 6 Apartments, LLC, filed bankruptcy on February 19, 2009. Meanwhile, the State of West Virginia revoked Falling Run's articles of organization in November of 2009. Augusta Apartments sought bankruptcy protection on February 19, 2010, 2 and Benjamin Warner filed personal bankruptcy on April 22, 2010.
The Warners and all of their entities failed to pay their numerous debts, including those sums owed to First United. Noconstruction was ever begun on the Core Facility. To this day, the leased property remains a vacant gravel lot used for hourly parking. All of the Warner entities, including Falling Run, failed to pay the line of credit when it came due on June 29, 2010. Finally, on March 18, 2011, First United filed this action against Falling Run as guarantor of the loan.
At the hearing before Magistrate Judge Kaull, Benjamin Warner could not state whether Falling Run had any cash assets at all, or even whether a bank account existed in its name. His testimony further established that the Warners were using the daily cash receipts from the parking operation to cover their own personal living expenses. Subsequent to the hearing, based in part on the lack of any progress towards the construction of the Core Facility, the City gave notice of default to Falling Run under the terms of the Ground Lease.
First United seeks the appointment of a receiver, claiming 1) that Falling Run's interest in the leased property represents the bank's sole remaining security for Falling Run's guaranty obligations, and 2) that its security is threatened by Falling Run's default under the Ground Lease. Both Falling Run and the Cityobject to this request, but on different grounds. Despite these objections, the Court concludes that appointment of a receiver is appropriate.
Falling Run argues first that Magistrate Judge Kaull failed to correctly apply the law governing preliminary injunctive relief. It further contends that First United will not suffer harm from the loss of its security interest; that the appointment of a receiver would be futile; that First United does not face imminent harm; and that Johns should not be appointed as a receiver. Falling Run's objections, however, do not extend to the recommended denial of its motion to dismiss. The Court will address each of these objections in turn.
Falling Run's contention that Magistrate Judge Kaull did not correctly apply the law governing preliminary injunctive relief is misplaced as the R&R only provided a recommendation regarding the appointment of a receiver. While both injunctive relief and the appointment of a receiver may be granted as preliminary equitable remedies, the Federal Rules of Civil Procedure treat them differently. See Fed. R. Civ. P. 65(a)(governing preliminaryinjunctive relief), and Fed. R. Civ. P. 66 ().
These remedies serve different purposes. A preliminary injunction affords a party temporary relief "that can be granted permanently after trial." Real Truth About Obama, Inc. v. Federal Election Comm'n, 575 F.3d 342, 345 (4th Cir. 2009) (quoting Winter v. Natural Resources Defense Council, Inc., 129 S. Ct. 365, 376 (2008)), vacated on other grounds by 130 S. Ct. 2371 (2010). A receiver, on the other hand, may be appointed for the limited...
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