Wincopia Farms, LP v. G&G, LLC et al

• Decision Date: 31 March 2011
• Docket Number: Adv. Proc. No. 07-0908-JS,Case No. 07-15899-JS
• Parties: WINCOPIA FARMS, LP, Plaintiff v. G&G, LLC, and TRENT GOURLEY, Defendants
• Court: U.S. Bankruptcy Court — District of Maryland

WINCOPIA FARMS, LP, Plaintiff

v.G&G, LLC, and TRENT GOURLEY, Defendants

Case No. 07-15899-JS

Adv. Proc. No. 07-0908-JS

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MARYLAND

Entered: March 31, 2011

Date signed: March 31, 2011

JAMES F. SCHNEIDER

U. S. BANKRUPTCY JUDGE

UNITED STATES BANKRUPTCY COURT'S

REPORT AND RECOMMENDATION

TO THE UNITED STATES DISTRICT COURT

THAT ADVERSARY PROCEEDING BE DISMISSED

INTRODUCTION

This Court delayed the writing of this opinion in the expectation that it would not be necessary after the Office of the United States Trustee filed a motion to dismiss or convert the underlying bankruptcy case on September 2, 2010; but the motion was withdrawn on December 9, 2010, upon the debtor's payment of quarterly fees and filing of operating reports. The plaintiff/debtor is a single asset real estate bankruptcy in which the real estate has been foreclosed upon and sold.

The instant adversary proceeding was initiated in the U. S. Bankruptcy Court for the District of Maryland by the debtor on November 9, 2007. On April 9, 2008, the debtor filed a first amended complaint which this Court dismissed on March 25, 2009. Presently before this Court are the debtor/plaintiff's motion to file a second amended complaint, the defendants' motion to prohibit the plaintiff from filing a second amended complaint and the defendants' motion to dismiss.

The plaintiff stated in all three complaints that they were core proceedings pursuant to 28 U.S.C. &sect157(b), which the defendants did not contest. Nevertheless, this Court has determined in this opinion that both the first amended and second amended complaints are non-core, related proceedings which this Court may hear and determine, but in which it may not enter final orders, pursuant to 28 U.S.C. &sect157(c). Wherefore, this opinion is presented in the form of Proposed Findings of Fact andConclusions of Law to be transmitted to the U. S. District Court, pursuant to Federal Rule of Bankruptcy Procedure 9033.

In an earlier opinion, issued March 25, 2009 [P. 151],¹ this Court granted the motion of the defendant, G&G, LLC to dismiss the complaint brought against it by the debtor, Wincopia Farms Limited Partnership ("WLP") for lack of standing to sue. On March 31, 2009, WLP filed a motion [P. 161] to reconsider the dismissal only as to Count II of the complaint which alleged fraud. The motion asserted that the opinion had erroneously concluded that the plaintiff's guarantee was governed by Virginia law, rather than the law of Maryland. Having reviewed the guarantee and acknowledging its error, this Court granted the plaintiff's motion for reconsideration by order [P. 175] dated May 29, 2009.²

This Court has reached the legal conclusion that under Maryland law, the debtor/guarantor of a loan is without standing to sue the lender for alleged fraudulent misconduct in making a loan to the borrower, absent an independent harm to the guarantor. For the reasons set forth, it is hereby recommended to the U.S. DistrictCourt for the District of Maryland that the motion to dismiss the instant adversary proceeding be granted.

PROPOSED FINDINGS OF FACT

1. On June 28, 2007, the debtor in possession, Wincopia Farms, LP ("WLP"), filed the instant Chapter 11 bankruptcy case. In its bankruptcy petition, WLP declared that the nature of its business was single-asset real estate, as that term is defined by 11 U.S.C. § 101(51B) of the Bankruptcy Code.³ In Schedule A, the debtor in possession indicated that it owned approximately 124 acres of land (the "property") located in Howard County, Maryland, which it valued at approximately $30 million.

2. The property was encumbered by an indemnity deed of trust (the "IDOT") in favor of G&G, LLC,⁴ a Virginia limited liability company, as guaranty⁵ for commercial loans made to Wincopia Farms, Inc. ("WI" or "the borrower"), a separatelegal entity that operated a nursery on the land under a lease from WLP. WI did not file a bankruptcy petition and is not a debtor.

3. Both WI and WLP were owned and operated by members of the Hearn family.

4. On August 1, 2007, G&G filed a complaint in the Circuit Court for Arlington County, Virginia, against non-debtors WI, Ruth Hearn, the Ruth Roberts Hearn Marital Trust and the Harry Cissel Hearn Marital Trust, based upon loan defaults. On November 9, 2007, the circuit court entered judgments against the trusts and WI in the amount of $12,118,909.04. On December 28, 2007, the court entered a judgment against Ruth Hearn in the same amount. On January 10, 2008, she filed a motion to vacate the judgment, which the court denied on January 25, 2008.

5. On October 2, 2007, G&G filed a motion for relief from the automatic stay [P. 38] in the instant bankruptcy proceeding of WLP. On December 13, 2007, this Court modified the automatic stay by order [P. 88], that required WLP to tender payments to G&G and satisfy certain other conditions in order for the automatic stay to remain in effect. The automatic stay was terminated on December 31, 2007, upon the failure of Wincopia to comply with the conditions.

6. On January 24, 2008, a sale of the property was scheduled to occur on February 14, 2008, On February 13, 2008, WLP filed a motion in the Circuit Courtfor Howard County to stay the sale, in which it charged G&G with fraud. The circuit court denied the stay and the property question was sold at auction on February 14, 2008, to G&G, which purchased the property for $12,500,000.

7. On April 2, 2008, WLP filed objections to the ratification of the sale which the circuit court overruled, and the sale was finally ratified on July 17, 2008. On August 8, 2008, WLP filed a notice of appeal.

8. On appeal, the Court of Special Appeals affirmed the denial of an injunction against the sale. Wincopia Farm v. Goozman, 188 Md. App. 519, 982 A.2d 868 (2009), cert. denied, 412 Md. 496, 988 A.2d 1010 (2010). The Court of Special Appeals did not address the merits of the fraud allegations raised by WLP, other than to state its conclusion that "any alleged misconduct . . . was 'totally unrelated to [the] default.'" 982 A.2d at 875.

9. Meanwhile, on November 9, 2007, Wincopia filed the instant adversary proceeding in this Court in which it alleged that G&G had committed fraud against WI in making the various loan transactions.⁶ On April 9, 2008, the plaintiff filed a first amended complaint [P. 25], which, as indicated supra, alleged breach of contract(Count I), intentional misrepresentation and fraud (Count II), negligent misrepresentation (Count III), breach of fiduciary duty (Count IV), tortious interference (Count V) and Maryland Securities Act violations (Count VI).

10. On March 25, 2009, this Court granted the defendant's motion to dismiss the complaint on the ground that under the law of Virginia, which appeared to govern the guaranty, the plaintiff/debtor lacked standing as guarantor of the loans to maintain causes of action against G&G as lender for making the loans to WI as borrower. Because all of the counts in the complaint against G&G were derivative of the rights of the borrower, the opinion held that WLP had no standing to pursue the claims as guarantor. In addition, Count III that alleged negligent misrepresentation was dismissed on the merits under the "economic loss" rule. Memorandum opinion, supra [P. 151].

11. On March 31, 2009, WLP filed a motion to reconsider the dismissal [P. 161] only as to Count II, based upon the assertion that the guaranty was governed by Maryland law rather than the law of Virginia, but that under the law of both states, the plaintiff had the right as guarantor, independent of the rights of the borrower, to sue the lender for fraudulently inducing it to enter into the indemnity deed of trust.

12. On May 29, 2009, this Court granted the motion by order [P. 175] which vacated the dismissal order only as to Count II.

13. Meanwhile, on May 21, 2009, WLP filed the instant motion to amend its complaint [P. 172], to which it appended as an exhibit its proposed second amended complaint.⁷14. The second amended complaint added allegations of fraud allegedly committed by the defendants against WLP, inter alia, the misrepresentation that WI had been approved for the loans, whereas G&G made no determination that WI was creditworthy; that G&G led WLP to believe that WI enjoyed a so-called "good behavior" right of extension, which was false; that G&G misrepresented to WLP that WI received the face amount of each loan, whereas WI received a lower amount of loan proceeds at a higher rate of interest than the loan documents authorized, thereby inflating the obligation of WLP under its guarantee; that G&G misrepresented to WLP that WI would receive a membership interest in G&G; that G&G failed to disclose its secret policy of structuring loans in such a manner as to insure borrowers' defaults that enabled G&G to foreclose upon collateral and reap a windfall; that such "pawn shop" lending involved extending credit to borrowers in desperate straits with unconscionable terms, making "grossly over-collateralized loans" that caused WLP to lose real property valued at $50 million that secured loans worth a fraction of the amount lent.

15. On June 15, 2009, G&G filed a motion to dismiss the second amended complaint [P. 179] and an objection to the plaintiff's motion to file the second amended complaint [P. 180]. The bases for the motion and the objection are the same,namely the grounds of futility and the failure to state a claim for which relief can be granted, including the failure to allege fraud with specificity.⁸

PROPOSED CONCLUSIONS OF LAW

SUBJECT MATTER JURISDICTION

1. The U. S. Bankruptcy Court has subject matter jurisdiction over the instant adversary proceeding pursuant to 28 U.S.C. § 1334. Venue is appropriate pursuant to 28 U.S.C. § 1409.⁹

2. Federal bankruptcy jurisdiction operates in rem. Tennessee Student Assistance Corporation v. Hood, 541 U.S. 440, 124 S.Ct. 1905, 158 L. Ed.2d 764 (2004)...