U.S. v. Fairway Capital Corp.

• Decision Date: 08 June 2006
• Docket Number: C.A. No. 00-035L.
• Citation: 433 F.Supp.2d 226
• Parties: UNITED STATES of America, Plaintiff, v. FAIRWAY CAPITAL CORPORATION, Defendant.
• Court: U.S. District Court — District of Rhode Island

433 F.Supp.2d 226

UNITED STATES of America, Plaintiff, v. FAIRWAY CAPITAL CORPORATION, Defendant.

C.A. No. 00-035L.

United States District Court, D. Rhode Island.

June 8, 2006.

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Eugenia M. Carris, U.S. Attorney's Office, Boston, MA, Lisa Dinerman, US Attorney's Office, Providence, RI, Thomas W. Rigby, U.S. Small Business Administration Office of General Counsel, Washington, DC, for Plaintiff.

Joseph L. Decaporale, Jr., Scott J. Summer, Montaquila & Summer, P.C., Providence, RI, for Defendant.

In Re Motion of the Government of the Virgin Islands Objecting to the Receiver's Recommended Disposition of Claims.

DECISION AND ORDER

LAGUEUX, Senior District Judge.

This matter comes before the Court on a Motion filed by the Government of the Virgin Islands ("Claimant") Objecting to the Receiver's Recommended Disposition of the Claims of the Government of the Virgin Islands as Required by the Court's Order dated February 16, 2005.

Claimant seeks to have this Court dismiss for lack of subject matter jurisdiction or for insufficient service of process the Receiver's opposition to Claimant's equitable claim for possession of Protestant Cay and all permanent improvements thereon, including the Hotel on the Cay Resort. Alternatively, Claimant requests that this Court abstain from making any determination as to Claimant's equitable claim for possession. If this Court exercises jurisdiction over this matter, Claimant seeks judgment from this Court granting its equitable claim and its monetary claims to the extent that they were allowed by the Receiver. Claimant also requests a plenary trial concerning the portion of its monetary claims that the Receiver disallowed.

For the reasons set forth at length below, this Court exercises its exclusive jurisdiction over this matter; accepts and adopts the Receiver's recommendation to disallow Claimant's equitable claim for possession of Protestant Cay; and accepts and adopts the Receiver's recommendations allowing in part and denying in part Claimant's monetary claims.

Facts and Travel

I. The Receivership

This matter began when the Small Business Administration (the "SBA") filed a Complaint for Receivership, Judgment and Permanent Injunctive Relief (the "Receivership Complaint") against Fairway Capital Corporation ("Fairway"), a Rhode Island corporation, on January 19, 2000 for, among other things, the failure of Fairway to pay amounts it owed to the SBA. This Court, by its March 13, 2000 Order (the "Receivership Order") issued pursuant to 15 U.S.C. § 687c, established the Fairway Receivership Estate (the "Fairway Estate") and took exclusive jurisdiction of Fairway "and all of its assets and property, of whatever kind and wherever located ..." Receivership Order, ¶ 1. The Receivership Order also appointed the SBA as Receiver "for the purpose of marshaling and liquidating all of Fairway's assets and satisfying the claims of creditors therefrom in the order of priority as determined by this Court." Id.

Later, this Court entered an Order dated May 2, 2001 Approving the Form and Manner of Notice to Claimants and Establishing a Claims Bar Date (the "Bar Date Order") that established a procedure by which creditors would be given notice to present their claims to the Receiver by a certain date. Pursuant to the Bar Date Order, the Receiver solicited claims against Fairway, the Fairway Estate, and assets or funds in the possession of the Receiver. The Receiver made direct mailings of the Notice to All Creditors or Claimants of Fairway Capital Corporation (the "Notice to Creditors") to all known prospective claimants and published the Notice to Creditors twice in The Providence Journal and The St. Croix Avis.

In response to the Receiver's solicitations, Claimant submitted equitable and monetary claims to the Receiver. On October 20, 2004, the Receiver filed its Notice of Recommended Disposition of Claims Received in Response to Claims Bar Date ("Recommendations") recommending that Claimant's equitable claim for immediate possession of Protestant Cay be denied and that Claimant's monetary claims be allowed in part and denied in part. On February 16, 2005, this Court issued an Order (the "Approval Order") granting the Receiver's Motion for Entry of an Order Approving the Receiver's Recommendations. The Approval Order also established a procedure by which this Court could hear any objections to the Receiver's Recommendations, including the specific factual and legal grounds for the objections. On April 27, 2005, Claimant submitted a Response in Opposition to the Receiver's Recommendations with this Court.

II. Standard of Review

In accepting or rejecting the claims of creditors, as well as in filing a report of findings of fact and conclusions of law, a receiver acts like a master. 3 Ralph Ewing Clark, Clark on Receivers § 650, 657 (3d ed.1959). A district court must decide de novo all objections to findings of fact and conclusions of law made or recommended by a master before ruling on the master's recommendations. Fed.R.Civ.P. 53(g)(1), (3)-(4).

Federal Rule of Civil Procedure 53 was amended in 2003 to include a de novo standard of review for a master's findings of fact. Fed.R.Civ.P. 53 advisory committee's note, 2003 amendments. Rule 53 was "revised extensively to reflect changing practices in using masters" as courts appoint masters to perform a variety of functions. Id. Rule 53(g)(3) had formerly required the application of a clear-error standard of review to a master's factual findings. 9 James Wm. Moore et al., Moore's Federal Practice, § 53.42[1] (3d ed.1997). Such a deferential standard is now recognized to be more appropriate for findings that do not go to the merits of an underlying claim. See Fed.R.Civ.P. 53 advisory committee's note, 2003 amendments. The application of de novo review is consistent with the standard of review applied to those portions of a magistrate judge's report and recommendation to which an objection is made. See 28 U.S.C. § 636 (2005); Mills v. Brown, 372 F.Supp.2d 683, 685 (D.R.I.2005).

Consistent with the standard of review required under Fed.R.Civ.P. 53(g), this Court proceeds to apply a de novo standard of review to Claimant's objections to the findings of fact and conclusions of law contained in the Receiver's Recommendations.

III. Factual Background

In the Approval Order, this Court indicated that it would resolve Claimant's objections to the Receiver's Recommendations on the basis of the claim documents previously submitted to the Receiver as part of the Claims Bar Date procedure, the Receiver's Recommendations, Claimant's Motion by way of objection, and the Receiver's opposition to Claimant's Motion. With one exception, Claimant did not provide any specific factual objections to the Receiver's Recommendations. Thus, on the basis of these documents, including Chief Judge Ernest Torres' factual findings in Hotel on the Cay Time-Sharing Assn v. Kilberg, C.A. No. 97-279-T, 2000 WL 34019282 (D.R.I. Apr. 6, 2000), a separate action upon which the Receiver relied in composing its Recommendations, the Court finds the following facts to be undisputed except where otherwise noted.

A. Creation of the Time-Share Units

Protestant Cay is a small island located in the United States Virgin Islands and is owned by the Government of the Virgin Islands. On April 6, 1964, the Legislature of the Virgin Islands authorized the Governor of the Virgin Islands to negotiate a lease for Protestant Cay by Act No. 1179 (the "Enabling Act"). Within one month, the Governor executed the Ground Lease which leased Protestant Cay to Hotel on the Cay, Inc. for fifty years. The Ground Lease provides that the leasehold interest may be assigned by the lessee with the written consent of the Governor. Subsequently, two amendments of the Ground Lease were executed. Both Amendment I to the Ground Lease, dated December 30, 1968 ("Amendment I"), and Amendment II to the Ground Lease, dated December 16, 1992 ("Amendment II"), were signed by the Governor. Amendment II extended the term of the Ground Lease to the year 2020.

The Ground Lease was eventually assigned to Oliver Plunkett. In August of 1980, Plunkett filed the Declaration of Partial Leasehold Ownership Plan Establishing the Hotel on the Cay a Time-Sharing Vacation Ownership Plan (the "Declaration") with Claimant to create approximately 2,900 weekly time-share units at the Hotel on the Cay Resort (the "Resort"). After recording the Declaration, Plunkett sold approximately one half of the time-share units, leaving approximately 1,400 time-share units unsold. The Receiver claims an ownership interest in these unsold units.

B. Legend Resorts

In 1982, Plunkett declared bankruptcy. In 1986, the trustee of Plunkett's bankruptcy estate conveyed Plunkett's interest in the Ground Lease to Harborfront Properties, Inc. ("Harborfront"), a Virgin Islands corporation. The bankruptcy trustee simultaneously conveyed an interest in the unsold units to Protestant Cay, Ltd. On December 28, 1990, Legend Resorts, L.P. ("Legend"), a Rhode Island limited partnership, and TSA Acquisition, Inc. ("TSA") obtained the unsold units from Protestant Cay, Ltd. In order to purchase the unsold units and obtain an interest in the Ground Lease, Legend and TSA borrowed $1.7 million from Fairway. Fairway obtained a mortgage on the Ground Lease from Harborfront, as well as mortgages on the time-share units from Legend and TSA, and acquired a twenty percent equity ownership interest in Legend as a limited partner. From December 24, 1990 through November 28, 1995, Legend's general partner was N.E.B., Inc. ("NEB"), a Rhode Island corporation, while its limited partners included Joan Gerilli, Jane Cerilli, and Fairway. In 1991, Legend took an assignment of the Ground Lease from Harborfront with the consent of the Governor. The following year, Amendment II to the Ground Lease was...