Tulis v. M.e.-R.e. Holding, LLC (In re Barnett), Case No. 12-37991 (CGM)

• Decision Date: 29 December 2015
• Docket Number: Case No. 12-37991 (CGM),Adv. No. 14-09036 (CGM)
• Parties: In re: MICHAEL D. BARNETT and DENISE A. BARNETT, Debtors MARK TULIS, as the chapter 7 trustee, Plaintiff, v. M.E.-R.E. HOLDING, LLC, et al., Defendants
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

In re: MICHAEL D. BARNETT and

DENISE A. BARNETT, DebtorsMARK TULIS, as the chapter 7 trustee, Plaintiff, v. M.E.-R.E. HOLDING, LLC, et al., Defendants

Case No. 12-37991 (CGM)

Adv. No. 14-09036 (CGM)

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK

December 29, 2015

NOT FOR PUBLICATION

Chapter 7

MEMORANDUM DECISION GRANTING IN PART AND DENYING IN PART THE TRUSTEE'S MOTION FOR SUMMARY JUDGMENT

APPEARANCES:

Wilson, Elser, Moskowitz, Edelman et ano

1133 Westchester Avenue

White Plains, NY 10604

Attorney for the Chapter 7 Trustee

By: Kathleen A. Daly

David L. Tillem

McCabe & Mack LLP

63 Washington Street

P.O. Box 509

Poughkeepsie, NY 12602

Attorney for Defendant Alexander Gellatly

By: Richard R. DuVall

CECELIA G. MORRIS CHIEF UNITED STATES BANKRUPTCY JUDGE

Before the Court is the Trustee's Motion for Summary Judgment (the "Trustee's Motion" or "Motion") on his fifth cause of action in the adversary proceeding against Alexander Gellatly ("Gellatly") and M.E.-R.E. Holding, LLC¹ ("Holding"). See Compl., Oct. 22, 2014, ECF No. 1.² The Trustee's fifth cause of action "demands judgment against Gellatly in the sum of $1,953,794.00, plus interest from May 15, 2013," on five promissory notes (the "Notes"). Compl. ¶ 70. For the reasons set forth below, the Court grants in part and denies in part the Trustee's Motion.

Jurisdiction

This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a) and the Standing Order of Reference signed by Chief Judge Loretta A. Preska dated January 31, 2012. This is a "core proceeding" under 28 U.S.C. § 157(b)(2)(A) ("matters concerning the administration of the estate") and (E) ("orders to turn over property of the estate").

Background

On November 30, 2012, Michael D. Barnett ("Mr. Barnett") and Denise A. Barnett ("Ms. Barnett") (collectively the "Debtors") filed a joint bankruptcy petition, seeking Chapter 7 relief. See Petition, In re Barnett, No. 12-37991 (Bankr. S.D.N.Y. Nov. 30, 2012), ECF No. 1 ("Petition"). Prior to bankruptcy, Debtors retained ownership interests in several real estate companies, including (1) Route 299 Retail Center, LLC ("Retail Center"), (2) DJ Orchard, LLC ("DJ Orchard"), (3) Wappinger Gardens, LLC ("Wappinger Gardens"), (4) Vineyard CommonsHolding, LLC ("Vineyard Commons"), and (5) Highland Square Development, LLC ("Highland"). See Compl. ¶ 8; Answer and Countercls. Exs. 1-5, Dec. 15, 2014, ECF Nos. 12-1, 12-2, 12-3, 12-4, 12-5 ("Answer"). On September 17, 2010, by way of five purchase agreements ("Purchase Agreements"), Ms. Barnett sold Gellatly a percentage of her interests in each of the above-mentioned real estate companies. See Compl. ¶ 8; Answer Exs. 1-5; Defendant's Counter-Statement of Material Facts ("Def.'s SMF") ¶ 1, Aug. 6, 2015, ECF No. 50;³ Decl. David L. Tillem Supp. Trustee's Mot. Summ. J. ("Tillem Decl. Summ. J.") Ex. D Part 1 ("Ex. D.1"), at 25-62; Ex. D Part 2 ("Ex. D.2"), at 2-24, July 9, 2015, ECF Nos. 43-6, 43-7. In exchange, the Purchase Agreements called for at least partial payment by promissory note, to be due on May 15, 2013. See Answer Exs. 1-5; Tillem Decl. Summ. J. Ex. D.1, at 26, 38, 50; Ex. D.2, at 3, 15. The same day the Purchase Agreements were signed, Gellatly also executed five Notes, payable to Denise Barnett. Tillem Decl. Summ. J. Exs. F-1, F-2, F-3, F-4, F-5, July 9, 2015, ECF Nos. 43-10, 43-11, 43-12, 43-13, 43-14.

On May 18, 2011, roughly eight months after Gellatly executed the Notes, both of the Debtors entered into a commercial note (the "Commercial Note") with Wallkill Valley Federal Savings & Loan Association ("Wallkill") for $500,000. Def.'s SMF ¶ 10 (denying knowledge or information sufficient to form a belief as to whether Debtors executed the Commercial Note in favor of Wallkill); see also Compl. Ex. D; Tillem Decl. Summ. J. Ex. H, at 2-3, July 9, 2015, ECF No. 43-21. Under the terms of the Commercial Note, payments were scheduled to end on April 18, 2013. Tillem Decl. Summ. J. Ex. H, at 2. The entire balance would become due and payable on May 18, 2013. Id. On the same day Debtors entered into the Commercial Note, May 18, 2011, Ms. Barnett granted Wallkill a security interest in each of Gellatly's Notes as collateral to support the Commercial Note. Def.'s SMF ¶ 11; see also Tillem Decl. Summ. J. Exs. I-1, I-2,I-3, I-4, I-5, July 9, 2015, ECF Nos. 43-22, 43-23, 43-24, 43-25, 43-26; Compl. Ex. E. The five security agreements ("Security Agreements") conditionally transferred to Wallkill "all of the right, title and interest of Assignor in and to . . . certain Promissory Note[s] dated September 17, 2010, made by Alexander Gellatly, to Denise Barnett," effective upon Ms. Barnett's default on the Commercial Note. See, e.g., Tillem Decl. Summ. J. Ex. I-5.⁴ Prior to default, Ms. Barnett retained "the right to collect upon all installment payments due on the Assigned Note and to retain, use and enjoy the same." Id.

Before entering into the Commercial Note, the Debtors had Gellatly execute five estoppel certificates, certifying that Gellatly had no defenses to the Notes. Def.'s SMF ¶ 6; Compl. Ex. B; see also Tillem Decl. Summ. J. Exs. G-1, G-2, G-3, G-4, G-5, July 9, 2015, ECF Nos. 43-15, 43-16, 43-17, 43-18, 43-19. Gellatly affirms in each certificate that the corresponding Note "is due and payable in the original principal amount and that there are no defenses or offsets to said . . . Note." See, e.g., Tillem Decl. Summ. J. Ex. G-1.⁵ The certificates conclude that Gellatly

makes this covenant and declaration not only for the benefit of the holder of the . . . Note, but for the benefit of any subsequent holder of said Note, the undersigned intending that such subsequent holder or assignee shall rely upon this covenant and declaration in accepting an assignment of said . . . Note.

Id. After the Debtors entered into the Commercial Note with Wallkill, Gellatly executed a sixth estoppel certificate on May 27, 2011. Def.'s SMF ¶ 7; Tillem Decl. Summ. J. Ex.G-6, July 9, 2015, ECF No. 43-20; Compl. Ex. C. The sixth certificate was given by Gellatly "for the benefit of Denise Barnett . . . ." Tillem Decl. Summ. J. Ex. G-6. Gellatly further certified "[t]hat he is justly indebted to [Ms. Barnett] in the amount of $2,253,794.00 pursuant to the terms of the Notes as amended and as further amended and that [Gellatly] has no offsets or defenses to thedebt evidence by the Notes;" and that he "makes this covenant and declaration not only vfor [sic] the benefit of the holder of the Notes, butr [sic] for the benefit of any subsequent holder of the Notes or any of them . . . ." Id.

Neither the Debtors nor Gellatly defaulted on their respective obligations until after the Debtors filed for bankruptcy. Def.'s SMF ¶¶ 4, 36, 15-17;⁶ Tillem Decl. Summ. J. Ex. H; Tillem Decl. Summ. J. Ex. J, July 9, 2015, ECF No. 43-27. The Debtors' scheduled payments to Wallkill did not end until April 18, 2013. Tillem Decl. Summ. J. Ex. H, at 2. As of April 24, 2013, the Trustee claims that Debtors still owed Wallkill $463,913.10 on the Commercial Note. Tillem Decl. Summ. J. Ex. J. On April 24, 2013, Wallkill demanded payment from Gellatly. Def.'s SMF ¶ 16; see also Tillem Decl. Summ. J. Ex. J. On May 15, 2013, Gellatly's obligation on the Notes came due. Tillem Decl. Summ. J. Exs. F-1-F-5. Gellatly did not make any payments on the Notes. Def.'s SMF ¶ 36. On July 31, 2013 in an agreement (the "Agreement"), approved to the extent so-ordered by this Court, Wallkill transferred its security interest to the Trustee. See Order Approving Agreement, In re Barnett, No. 12-37991, ECF No. 54; see also Def.'s SMF ¶¶ 18, 19, 22; Tillem Decl. Summ. J. Ex. A, at 10, July 9, 2015, ECF No. 43-2.

The Agreement provided that after Wallkill assigned and delivered the Notes and the Security Agreements to the Trustee, Wallkill was to "timely file a proof of claim in the Barnett bankruptcy case regarding the amounts due for the Commercial Note as of the date of the bankruptcy filing." Tillem Decl. Summ. J. Ex. A, at 13. Under the Agreement's terms, "[t]he Trustee acknowledges a Total Due to Wallkill under the Commercial Note in the sum of $463,913.10 as of April 24, 2013," and promises that "[t]he Trustee shall use reasonable efforts to enforce the payment provisions of the [Original] Notes and recover the amounts duethereunder, including, but not limited to the commencement of litigation against Gellatly, if necessary, at the expense of the estate." Id. The Agreement also promises that Wallkill will be paid first from the sums recovered on the Notes until it is paid in full. Id. at 14. The Trustee may keep any funds in excess of the amount due to Wallkill. Id.

On July 9, 2015, the Trustee filed his Motion, seeking to recover "the amounts due" on all five of the Notes. Trustee's Mem. Law Supp. Summ. J. 1, 10, July 9, 2015, ECF No. 45 ("Mem. Summ. J."). The Trustee claims the assignment of Wallkill's security interest provides him the authority to enforce the Notes against Gellatly. Id. at 5. The Trustee asserts that summary judgment is appropriate due to the fact Gellatly executed the Notes and failed to pay when they came due. Id. at 1, 10. The Trustee argues that he is not subject to Gellatly's defenses to payment on the Notes due to his holder in due course status and the estoppel certificates. Id. at 1, 5, 6-8.

Gellatly filed an opposition on August 6, 2015. Gellatly claims that the Trustee does not have the power to enforce the Notes against Gellatly. Mem. Law Opp'n to Mot. Summ. J. 1, Aug. 6, 2015, ECF No. 51 ("Def.'s Mem. in Opp'n"). Gellatly argues the Trustee takes the Notes subject to Gellatly's defenses as the Trustee is not a holder in due course and may not rely on the estoppel certificates. Id. at 2-6. Gellatly asserts that summary judgment is not warranted here as there are genuine issues of material fact regarding Gellatly's defenses to payment. See id. at 21. Gellatly claims that three of the five Notes, including the Wappinger...