In re: CECIL DAUGHTREY, JR., PATRICIA A. DAUGHTREY, Debtors. CECIL DAUGHTREY, JR., PATRICIA A. DAUGHTREY, Plaintiffs-Appellants, versus LUIS E. RIVERA, II, Defendant-Appellee.
No. 15-14544
IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT
July 24, 2018
D.C. Docket No. 2:15-cv-00029-JES; 8:13-bkc-14831-FMD
[PUBLISH]
Appeal from the United States District Court for the Middle District of Florida
(July 24, 2018)
Before TJOFLAT, ROSENBAUM and SENTELLE,* Circuit Judges.
*The Honorable David Bryan Sentelle, United States Circuit Judge for the District of Columbia Circuit, sitting by designation.
In this case, Cecil and Patricia Daughtrey filed a Chapter 7 bankruptcy petition for the sole purpose of preventing the sale of their property in a public auction to be held pursuant to a state court judgment that foreclosed the mortgage on the property. After the public auction was automatically stayed under
Before us now is the Daughtreys’ appeal of the District Court‘s affirmance of the Bankruptcy Court‘s decisions denying the motion to convert the case and approving the compromise agreement. We find no merit in their appeal, and accordingly affirm.
I.
The Daughtreys (“Debtors“) employed in succession seven law firms in their mortgage foreclosure case and three firms in the bankruptcy proceeding. The litigation has been protracted and contentious. That said, we begin our discussion with the entry of the final judgment in the mortgage foreclosure case and the filing of Debtors’ Chapter 7 petition. From there, we follow the strategies Debtors’ lawyers took to thwart 72 Partners’ (“Creditor“) effort to obtain satisfaction of its judgment.
A.
The property consists of 2,500 acres of real estate in Sarasota County, Florida (the “Property“), most of which Mr. Daughtrey inherited from his father.1 This acreage is used mainly to grow sod and for cattle grazing. On June 8, 2010, Debtors obtained a two-year loan for $2,371,840 from BSLF Holdings, LLC, and secured it with a mortgage on the Property. The mortgage note carried an interest rate of 13.5% per annum payable quarterly. It was a “balloon mortgage,” in that the principal, $2,371,840 (plus any unpaid interest), was due at maturity.
Debtors made the first interest payment on September 8, 2010, in the sum of $80,049. After they failed to make the payments due on December 8, 2010 and March 8, 2011, BSLF declared the loan in default and on May 25, 2011 brought suit in the Sarasota County Circuit Court to foreclose the mortgage.2 On July 20, 2011, while the case was pending, BSLF assigned the note and mortgage to Creditor.
On May 16, 2013, the Circuit Court entered an order scheduling the case for trial on October 14, 2013.3 When court convened for the trial that day, Debtors failed to appear.4 The trial therefore proceeded
based on Creditor‘s submission, entered a final judgment of foreclosure in the sum of $4,267,436.6 The judgment provided that if Debtors failed to satisfy the judgment, the Property would be sold at a public auction held on November 18, 2013.
On October 24, 2013, Debtors moved the Circuit Court to set aside the judgment of foreclosure and for a new trial.7 Two weeks later, on November 7, in an effort to stay the public auction and proceeding without counsel, they petitioned the Bankruptcy Court for relief under Chapter 7 of the Bankruptcy Code.8 Under
and expenses, and creditors’ claims in the following schedules appended to their petition. Schedule A - Real Property listed the Property as an asset, describing it as “Residential/Commercial,” representing that it had a value of $70 million, and claiming that it was subject to a homestead exemption under the Florida Constitution.9
Water rights,” $15 million.11 Schedule D - Creditors Holding Secured Claims listed Creditor with a claim of $4,267,436, which was “[i]nvalid” because the judgment on which it was itself based was a “predatory loan“;12 and Gilberti Water Company, with a claim of $10,250,000.13 Schedules E - Creditors Holding Unsecured Priority Claim, and F - Creditors Holding Unsecured Nonpriority Claims, both listed Creditor with a claim of $4,267,436.14
Schedule G - Executory Contracts and Unexpired Leases listed a contract with “LandTech Design Group, Inc,” for “Consultanting, [sic] Planning and Civil Engineering permits for Water Supply and Development projects.” Schedule I - Current Income of Individual Debtor(s) estimated Debtors’ monthly income to be: “Debtor” $2,000, “Spouse” $200. Schedule J - Current Expenditures of Individual Debtor(s), estimated Debtors’ average monthly expenses to be $2,200, excluding taxes and insurance premiums.
The Bankruptcy Court appointed Luis E. Rivera trustee of the bankruptcy estate (the “Trustee“). Meanwhile, on November 12, Creditor moved the Court to lift the § 362(a) stay pursuant to
The Trustee scheduled an
Meanwhile, on January 10, 2014, the Circuit Court denied Debtors’ October 24 motion to set aside the judgment of foreclosure and for a new trial and scheduled the public auction for March 11, 2014.18 On February 7, 2014, Eric A.
Lanigan noted his appearance as Debtors’ counsel in the foreclosure action and filed a notice of appeal to challenge the Circuit Court‘s judgment of October 14 and its ruling of January 10 in the Florida District Court of Appeal, Second District (“2DCA“).19
On February 20 Debtors, accompanied by their bankruptcy lawyer, Mr. Lampley, appeared at the meeting of creditors and were examined. During the course of the meeting, it became apparent that the Property was worth nothing close to Debtors’ $70 million valuation, but might have some value in excess of the judgment Creditor held. After consulting a real estate agent, the Trustee had reason to believe that the Property had a value in the range of $6 to $12 million. The Trustee, through counsel, therefore moved the Bankruptcy Court to reconsider its December 9, 2013 order granting Creditor relief from the § 362(a) stay.
The Bankruptcy Court heard the motion at a hearing held on March 3.20 At the conclusion of the hearing, the Court granted the motion and reinstated the stay.21
On April 1, the Trustee objected to Debtors’ assertion that the Property, in its entirety, was subject to a homestead exemption, contending that the Florida Constitution,
On April 8, the Bankruptcy Court granted Mr. Lampley‘s motion for leave to withdraw as Debtors’ counsel. Three days later, the Court continued the April
16 valuation hearing to June 2, 2014, to enable the Trustee to determine whether the estate would have to pay a significant capital gains tax - due to Debtors’ negligible tax basis in the Property because it had been inherited - if the Property were to be sold for a price substantially in excess of Creditor‘s claim. After consulting multiple real estate brokers, the Trustee found that the Property‘s value was not in the $6 to $12 million range. The relatively lower valuation was due to the Property‘s location, which was far from a significant highway, and the extended period of time that would be needed to sell it. He also found that the capital gains tax consequences to the estate made a sale of the Property impracticable. He therefore engaged Creditor in negotiations over a possible tax-free disposition of the Property via a compromise settlement.
On May 29, 2014, the Trustee filed a “Motion and Notice of Compromise of Controversy” with Creditor.23 In light of this development, the Court cancelled the June 2 hearing and, on June 11, rescheduled the hearing for July 24, 2014. The terms of the compromise, according to the motion, provided that Debtors would retain 160 acres of the Property as their homestead upon Creditor‘s release of its judgment lien on that acreage. The Trustee would (1) agree to the Court‘s entry of
an order lifting the stay so that Creditor could complete the foreclosure via a public auction, (2) give Creditor a quitclaim deed to the remaining 2,340 acres of the Property,24 and (3) release Debtors’ right to appeal the October 14, 2013 judgment of foreclosure. Creditor would give the bankruptcy estate $300,000 for distributions to general unsecured creditors, including Creditor, whose unsecured deficiency claim of $320,000 had been allowed.
On June 23, 2014, Mr. Lanigan entered his appearance as Debtors’ attorney and filed an objection to the Trustee‘s Motion and Notice of Compromise, contending
At the July 24 hearing, Mr. Lanigan informed the Bankruptcy Court that if the compromise were amended to include in the 160-acre homestead a water well
located on the Property, there was an “extremely high likelihood the whole thing goes away.” Debtors’ objection would likely be resolved. After stating what to the Court appeared obvious, that Debtors “filed the bankruptcy ... in order to stop [the foreclosure sale], to get the benefit of the automatic stay,” the Court turned to the compromise, which it had stated “sound[ed] like a really good deal.” “The Debtor ends up with 160 acres free and clear.”26 “[T]he Debtor really has to look long and hard at this deal.” The Court then continued the hearing until August 28 to allow the Trustee and Creditor to consider redrawing the compromise agreement to include the well within the homestead boundaries.
On July 31, the 2DCA dismissed Debtors’ appeal “for failure of appellants to comply with this court‘s order of June 24, 2014, requiring the filing of an initial brief.” On August 25, 2014, the July 31 order became “final” and the case was “closed.”
The Trustee and Debtor redrew the boundaries of Debtors’ proposed 160-acre homestead to incorporate the well and, on August 27, submitted to the Court
an “Amended Motion and Notice of Proposed Compromise” (the “Compromise“).27
entirety.” Lanigan had “spoken directly with all of the parties involved” and “anticipated” that the contract would be signed that day. If it was, he would be moving the Court to convert the case to a Chapter 11 proceeding. After the Court asked how long it would take “this contract to be effectuated” and informed him that its proceeds would have to cover “significant administrative costs ... the Trustee‘s quantum meruit compensation and the cost and fees of the Trustee‘s counsel,” Mr. Lanigan said that “[o]nce everybody signs, it would ... all be done within 30 days.” As for the “Trustee‘s quantum meruit expenses ... and legal fees,” he had a “lengthy discussion with [his] client ... as to the unequivocal need to pay those ... [a]nd they acknowledge that.”29 At this point, the Court turned to the Trustee for his thoughts. He expressed concern about Debtors’ failure to amend their schedules, especially the Schedule F which lists creditors with unsecured claims. The Trustee had “reason to believe” on the basis of Debtors’ testimony (at the 341 creditors’ meetings) that “there are [undisclosed] Schedule F creditors that would be entitled to a distribution.”
Council for the U.S. Trustee picked up where the Trustee left off with this statement:
The concern, Your Honor, is the statement the Chapter 7 Trustee Rivera made that he has knowledge of undisclosed creditors that
aren‘t on notice of this hearing much less any other hearing that has occurred in this case or any other activity in this case. And now we‘re learning today that Debtors’ counsel may want to convert [to Chapter 11]. This seems to be a stalling tactic and a delay mechanism when the creditors that his client knows about still are not being disclosed. Mr. Lanigan [has] been in this case for more than this morning. So if he has knowledge that his client hasn‘t disclosed everything, that needed to be filed before today.
Mr. Lanigan, in response, acknowledged that “there may be undisclosed creditors.” He closed his remarks by saying that he “would like to get this resolved without having to go into a Chapter 11. But ... if it takes a Chapter 11 to finally resolve these issues, ... a Chapter 11 could be successfully concluded.”
After hearing from the parties, the Court concluded the hearing with this statement:
All right. Mr. Lanigan, [the Trustee] threw out a concept, which was a structured dismissal concept, which might make more sense if your clients actually have a deal. I am very concerned, the case was filed back last November. It was obviously filed in order to prevent the secured creditor from proceeding with its foreclosure remedies. . . . [W]hat I am inclined to do is roll this over one more time, and that is to the September calendar, which will be September 25th at 10:00 a.m. And, Mr. Lanigan, you need to get on the phone with [the Trustee‘s lawyer and Creditor‘s
counsel] and see what can be worked out. And if the Debtors have a deal, the Debtors have a deal. And if that resolves everything and pays [Creditor], that‘s great. And if the deal is going to close in 30 days, that‘s wonderful.
(Emphasis added).30
The contract Mr. Lanigan “anticipate[d]” Debtors and the “significant investor” would sign on August 28 - one that would provide all of the funds needed to satisfy Creditor‘s judgment in full and cover the Trustee‘s expenses and legal fees as well - did not materialize. What did materialize was Debtors’ acceptance of an offer they had received two weeks earlier from two limited liability companies, Flint Family Farms, LLC, and Georgiana, LLC (the “LLCs“).31 On August 14, the companies had submitted an offer to purchase 1,449.63 acres of the Property for $3,334,148. The offer had a September 5 expiration date. Debtors accepted the offer on September 1, three days after the August 28 hearing adjourned.32
The record is silent on the point, but it is fair to assume that when Mr. Lanigan appeared before the Court on August 28, he was unaware of the companies’ offer, and Debtors’ intent to accept it. He became aware of it later, however, on September 15, when (according to Debtors’ next attorney, Paul DeCailly) Debtors instructed him to offer Creditor $3,334,000 in satisfaction of its judgment. He did not make the offer. Nor did he get on the phone with the Trustee‘s and Creditor‘s lawyers to see what could be worked out, as the Court had instructed. Instead, he moved the Court for leave to withdraw as Debtors’ counsel on September 22. The same day, Paul DeCailly replaced him as Debtors’ attorney33 and pursuant to
reorganization. The motion merely stated that the Debtors had an “absolute right” to the conversion to Chapter 11, and that a conversion “can bring about more value to the estate and pay a dividend to unsecured creditors in a more beneficial manner than the Chapter 7 trustee, and further, can accomplish this in a manner more economical than in a [C]hapter 7.”34 (Emphasis added). Joseph Gilberti, represented by Andrew Tapp, also filed a § 706(a) motion to convert the case to Chapter 11.35
The September 25 hearing began with a colloquy between the Court and Carmen Dellutri of The Dellutri Law Group.36 The U.S. Trustee had subpoenaed the firm (which, through David Lampley, had represented Debtors prior to March 5, 2014) for documents that might identity the unsecured creditors Debtors had failed to list in their Schedule F filing, which they had not amended. During the colloquy discussion, Mr. DeCailly intervened and announced that he intended to file amended schedules on behalf of Debtors: “amended schedules D, . . . F, E if
necessary.” The Court went one step further and ordered him to “file [the] amended schedules within 14 days” of a hearing scheduled for October 23.37
After that, Mr. DeCailly informed the Court that he and the Trustee had discussed the possibility of a “structured dismissal” of the case. He concluded, however, that a structured dismissal was not feasible. Therefore, Debtors would pursue the motion he had filed on September 22 to convert the case to a Chapter 11 proceeding. The Court asked: “The Debtors are going to convert to an 11 and then what?” Mr. DeCailly‘s answer:
[W]e do have a buyer - and from my perspective, I don‘t quite yet know what we‘re selling. . . . The current buyers, they‘re getting a survey now. They‘re spending the money to survey the property so we know exactly what‘s being sold and what‘s being kept. But the - this case can go forward in an 11. I understand it‘s been going on for almost a year. But in the statute, of course, there is no time limit. It just says that we can motion to convert [sic] at any time.38
After hearing from Mr. DeCailly, the Court turned to the Trustee‘s lawyer. She
convert is subject to a “good faith” requirement. She implied that Debtors were not proceeding in “good faith.” Moreover, if the case were converted to Chapter 11, it would wind up back in Chapter 7 due to Debtors’ inability to present a feasible plan of reorganization. The lack of good faith and the likelihood that the case would ultimately be disposed of under Chapter 7 militated against conversion: “conversion [was not] in the best interest of the estate.”
Creditor‘s counsel spoke next. After observing that Debtors had been represented by seven lawyers in the foreclosure action and were on their third lawyer in the bankruptcy case, counsel contended that Debtors’ attempt to convert the case to one under Chapter 11 was not in good faith; rather, the attempt was “nothing more than abuse of the [bankruptcy] process.” He summarized the lack of good faith.
At the last hearing Your Honor heard that there was a buyer that was imminent. Myself [and Trustee‘s lawyer], we both contacted Mr. Lanigan: Where‘s our payoff request? We‘re ready to make this happen for you. We‘ve heard nothing, Your Honor. And similar to the last several hearings, there is a flurry of activity that occurs the week of the hearing before Your Honor. And, Your Honor, the concern I have at this point is that the if Court grants this conversion, we‘re going to be right back in front of you in a month, another two months, three months, but ultimately we‘re going to end up right back here with this compromise because that‘s the only viable offer on the table at this point to resolve this case.
After the Court announced that the Compromise was “the proposal that‘s on the table” and Creditor‘s attorney reiterated that “a judge has already ruled in the state court action that we‘re entitled to final judgment of foreclosure on the whole parcel,” the Court asked Mr. DeCailly if he had “anything else” to say. He did. He explained what he meant when he stated earlier in the hearing that “[w]e do have a buyer.”
Your Honor, . . . there is a buyer out there who I‘ve spoken with who is willing to pay up to $3 million for [1,400 acres of] the property. But he‘s not—they‘re not right now in the position to sell it, and he‘s not in the position right now—he‘s not willing to turn over the funds in escrow until we determine where this case is going. I haven‘t had a chance to contact opposing counsel yet regarding that 3 million. I also would like to get the full picture of who‘s involved in this case. I agree, the schedules need to be looked at and they need to be redone. The Court had concern about filing proofs of claim. Well, as we know, if you convert it to an 11, we get a new proof of claim period. All the periods start over again. We can go forward knowing exactly—and it may end up in the same structured dismissal later on that you‘ve described, then we‘ll know everybody involved and we will have had an opportunity to propose this sale and get the lienholder together with the buyer.39
It is reasonable to infer that Mr. Tapp was talking about Debtors’ acceptance on September 1 of the offer the limited liability companies made on August 14 to purchase 1,449.63 acres of the Property for $3,334,148, and that Mr. DeCailly was well aware of the
Mr. DeCailly was representing that Debtors’ Chapter 11 reorganization plan would provide $3 million. He did not explain how $3 million would be sufficient to satisfy Creditor‘s judgment of $4,267,436, which was drawing interest at the rate of 4.75% per annum, much less pay the fees of the Trustee and his attorney, other administrative expenses, the capital gains tax the sale of the land would generate, and the unsecured creditors yet to be identified in an amended Schedule F which he had been ordered to file.
Having heard from counsel, the Court announced its rulings on Debtors’ and Gilberti‘s Motions to Convert and on the Compromise. The Court said that when it first reviewed the Compromise, “it appeared to be a win-win for everyone because the Debtors were on the verge of losing the [entire] property to foreclosure. They were able to discharge their obligation to 72 Partners, they were able to retain a 160-acre homestead property. That seemed like a great deal.” Continuing, the Court observed:
So here we are months after the original compromise was filed. There‘s really been no progress made that I can see. There‘s still a party that‘s out there waiting in the wings; may be interested in purchasing the property, but there‘s no offer before this Court. I‘ve been hearing about this party since the initial hearing, I think it was back at the July hearing. There are evidently other creditors out there that would share in a distribution to unsecured creditors. And for those reasons, at this time I can‘t find that the case should be . . . converted to a Chapter 11 case. . . . [T]he Marrama case does control.
And when the Debtors have elected to file a Chapter 7 case and now when they‘re on the eve of losing the property through a sale by the Chapter 7 Trustee, they now seek to convert late in the day, seek to convert the case to a Chapter 11. They‘re not here with a purchase contract. They‘re not here with something where they can tell the Court, tell the Trustee, tell [Creditors’ counsel], that there is an offer right here on the table today, ready to be closed within 30 days, which is what I believe we talked about at the last hearing. . . . [W]e‘re now hearing the Debtors should be entitled . . . to convert the case to a Chapter 11 case to propose a Plan. That‘s a lengthy process. They‘ve had the protection of the automatic stay now for 11 months. They‘ve had plenty of time to figure out what it is they want to do with this property. They‘ve been represented by [different] counsel on at least two prior occasions. And for all those reasons, I think it‘s appropriate to deny the motion to convert the case to a Chapter 11 and to grant the [Trustee‘s] amended motion to compromise with the carveout for the
Debtors of the well and the . . . 160-acre homestead property.
On October 3, 2014, the Bankruptcy Court entered orders denying Debtors’ and Gilberti‘s Motions to Convert for “the reasons stated orally in open court” on September 25. Four days later, the Court entered an order approving the Compromise “for the reasons stated orally in open court” on September 25. The Trustee and Creditor thereafter consummated the Compromise in part. The Trustee executed, and Creditor recorded with the Clerk of the Sarasota County Circuit Court, a quitclaim deed which carved out of the 2,500 acres of the Property a 160-acre homestead, including the well, and Creditor gave the Trustee $300,000.40 What remained to be done was the Court‘s entry of an order lifting the stay to enable Creditor to move the Sarasota County Circuit Court to set a date for the public auction and the sale of 2,340 acres of the property.
B.
On October 17, 2014, Debtors, through Mr. DeCailly, moved the Court for “reconsideration” of its order denying their September 22 Motion to Convert. The motion asserted that the Motion to Convert had been filed in good faith, contrary to the position the Trustee and Creditor had taken at the September 25 hearing. The Trustee and Creditor had argued that the filing was not in good faith, and instead constituted an abuse of the bankruptcy process.
Although styled a “Motion for Reconsideration,” the motion was an entirely new Motion to Convert, for it was based on facts that had not been disclosed either before or after the September 22 Motion to Convert was filed. Instead, the motion for reconsideration was based on the following facts and two documents Debtors were providing to the Court for the first time. Namely, that
the Debtors had arranged for an offer to the secured creditor a purchase agreement for the property for $3,334,000.00 and had forwarded it to their attorney [Lanigan] on September 15, 2014. . . . Their attorney never acted on the request to present the offer to counsel for 72 partners as instructed. On . . . September 21, 2014 the Debtor[s] terminated the attorney client relationship between prior counsel and them, and retained the services of undersigned [Mr. DeCailly]. The parties met and discussed the best way to proceed, and it was determined that a motion to convert the case should be filed. Counsel drafted and filed a motion.41
The two documents, which were attached to the motion, purported to be separate agreements to purchase portions of the Property. The first document, entitled “Agreement to Purchase Real Estate,” was in the form of an offer extended to Debtors on August 14, 2014 by “Georgiana, LLC” and “Flint Family Farms, LLC,” to purchase 1,449.63 acres of the Property for $3,334,148.42 The offer was “contingent on financing acceptable to purchaser[s].” If acceptable financing was available, the purchase would close “30 days after Purchaser[s]’
The second document, entitled “Agreement,” was entered into on October 14, 2014. The LLCs agreed to purchase the Property (except for the 160-acre homestead) for $4,621,000. The closing was to be held “fifteen days after the entry of the sale order [by the Bankruptcy Court],” and was subject to several other conditions precedent.43
On October 21, four days after Mr. DeCailly moved the Court to reconsider its order denying Debtors’ Motion to Convert, Mr. Gilberti moved the Court to reconsider its order approving the Compromise.44
The Bankruptcy Court heard Debtors’ and Mr. Gilberti‘s motions on November 5, 2014. Before it considered the motions, however, the Court questioned Mr. DeCailly about Debtors’ failure to amend their Schedules, especially Schedule F, listing the unsecured creditors. He said that twenty-seven creditors needed to be listed, some of whom “were closed.” He indicated that an amendment would be forthcoming.
With the unsecured creditor issue out of the way, the Court turned to the Debtors’ October 14 Agreement with the LLCs with this comment: “If they have a buyer ready, willing and able to close on the property for $4.621 million, then tell us what the closing date is and work it out.” Mr. DeCailly‘s reply: “I believe we can close within 15 days.” With that, the Court turned to the Trustee‘s lawyer.
The Trustee‘s lawyer pointed out that in addition to the above payments, given Debtors’ very low basis in the Property (most of which had been inherited), a significant capital gains tax would have to be paid. To pay the tax, the Property (less the 160-acre homestead) would have to be sold for $6 to $7 million. It was because a sale at that price was out of the question that the Trustee “entered into this agreement . . . with 72 Partners, because it carved out what was so important to the Debtors . . . their acreage and the well.”
The Court asked Mr. DeCailly whether there were “tax consequences to the Debtors.” His response: “Yes. And I asked [Mr. Daughtrey to] try to figure out his basis. . . . That‘s a daunting thing for him right now . . . to figure that out.” But, he continued, “[w]e can work around the tax issues.” He then revealed what was actually behind the motion for reconsideration—to convert the case to a Chapter 11 and sell the Property (less 160 acres) for $4,621,000. The point is these are farmers. This land has been in their family for a long time. And if it must—if it cannot—absolutely cannot stay . . . in their family, then
The Court‘s response was that if it did not approve the Compromise, Debtors would be faced with
[t]he foreclosure of the property, so they would have had nothing. They wouldn‘t have had their homestead. They wouldn‘t have had their well. That‘s why . . . this resolution seemed to be a win-win for everybody, because the Daughtreys get to keep their [160] acres, they get to keep their well, 72 Partners is paid and gone.
The Court next heard from Creditor‘s attorney. He reminded the Court that the Compromise had been “consummated,” and that in recording the Trustee‘s deed, Creditor had expended “thirty or forty thousand dollars [on] documentary stamp taxes.” In addition, having learned that Debtors had been “receiving payments from sod companies . . . stripping the property of sod” and that “[t]here [were] multiple hunting leases that the Daughtreys had been receiving money for,” Creditor had taken steps to “secure[] the property.” Creditor‘s attorney also reminded the Court that over the previous eighteen to twenty-four months, “Gilberti ha[d] placed . . . about $70 million in claims liens against the property [and] had the Daughtreys execute various deeds to him.” Some were recorded after the lis pendens was recorded in connection with the mortgage foreclosure action; others were filed post-petition. Mr. DeCailly acknowledged the existence of Gilberti‘s post-petition liens and that if the case were converted to Chapter 11, proceedings would need to be initiated to nullify the deeds and the liens “[b]ecause no title company is going to back this sale, if it‘s a sale.”
After hearing from Gilberti‘s attorney, who confirmed that Gilberti had not filed a proof of claim in the case, and instructing the Trustee‘s attorney to ensure that Debtors filed an amended Schedule F, the Court adjourned the hearing.
On November 18, 2014, the Court denied Debtors’ October 17 motion for reconsideration of its October 3 order denying Debtors’ Motion to Convert and Mr. Gilberti‘s October 21 motion for reconsideration of its October 7 order approving the Compromise. The Court also entered an order granting Creditor‘s motion for relief from the automatic stay.
C.
Debtors, still represented by Mr. DeCailly, appealed the Bankruptcy Court‘s decisions to the District Court on December 8, 2014. DeCailly filed two notices of appeal. One challenged the Bankruptcy Court‘s order of October 3, denying Debtors’ Motion to Convert, and its order of November 18, denying their motion for reconsideration of that order. The other notice challenged the Court‘s October 7 order granting the Trustee‘s amended motion to approve the Compromise. The District Court consolidated the appeals. The District Court affirmed the Bankruptcy Court‘s orders of October 3, October 7, and November 18, 2014, finding no abuse of discretion in the Court‘s decisions. On the conversion issue, the District Court concluded that the Bankruptcy Court, following Marrama‘s teaching, properly found that Debtors failed to present a feasible plan of reorganization. The District Court reasoned that Debtors provided no time frame for filing and consummating a Chapter 11 Plan. Assuming the proposed October 14, 2014 Agreement between Debtors and the LLCs45 became the Plan, Debtors would incur a capital
Debtors disagree with the District Court‘s analysis and therefore appeal its judgment.
II.
“In the bankruptcy context, this court sits as a second court of review and thus examines independently the factual and legal determinations of the bankruptcy court and employs the same standards of review as the district court.” In re Optical Techs., Inc., 425 F.3d 1294, 1299–1300 (11th Cir. 2005) (quotation omitted). We review the legal conclusions of either the bankruptcy court or the district court de novo, and the bankruptcy court‘s factual findings for clear error. Id. A factual finding is not clearly erroneous unless, after reviewing all of the evidence, we are left with “a definite and firm conviction that a mistake has been committed.” Lykes Bros., Inc. v. U.S. Army Corps of Eng‘rs, 64 F.3d 630, 634 (11th Cir. 1995) (citing United States v. U.S. Gypsum Co., 333 U.S. 364, 395, 68 S. Ct. 525, 542 (1948)).
A bankruptcy court‘s approval of a compromise or settlement is reviewed for abuse of discretion. Christo v. Padgett, 223 F.3d 1324, 1335 (11th Cir. 2000). The standard of review applied specifically to a bankruptcy court‘s denial of a motion to convert, on the other hand, appears to be a question of first impression in this Circuit. The Trustee contends that the proper standard is abuse of discretion.46
Debtors argue we should review the ruling de novo. The District Court reviewed it for abuse of discretion.47
The weight of authority leans manifestly towards abuse of discretion.48
A bankruptcy court abuses its discretion when it either misapplies the law or bases its decision on factual findings that are clearly erroneous. In re Mandalay Shores Co-op. Housing Ass‘n, Inc., 21 F.3d 380, 383 (11th Cir. 1994). In conducting abuse of discretion review, we “recognize the existence of a range of possible conclusions” the trial court may reach and “must affirm unless we find that the court has made a clear error of judgment, or applied the wrong legal standard.” In re Kingsley, 518 F.3d 874, 877 (11th Cir. 2008) (internal quotation marks and citation omitted) (alteration accepted).
With these principles in hand, we consider Debtors’ appeal. We begin with their challenge to the denial of their Motion to Convert. From there, we move to the denial of their motion for reconsideration and then to the approval of the Compromise.
III.
A.
Although Debtors appealed the Bankruptcy Court‘s orders of October 3, 2014, denying their Motion to Convert, and November 18, 2014, denying their motion for reconsideration, in their opening brief they lump the challenges together. In his answer brief, the Trustee does the same. We treat the appeals separately.
Debtors argue that they had an “absolute right” under
In his answer brief, the Trustee disagrees with Debtors’ right-to-convert argument for three reasons. First, the Trustee takes issue with the notion that a debtor has an “absolute right” under
Second, the Trustee argues that Debtors’ eleventh-hour Motion to Convert the case evidenced an absence of good faith. Debtors’ sole purpose in seeking conversion was to thwart the approval of the Compromise. Mr. DeCailly admitted as much at the November 5, 2014 hearing. Debtors wanted the LLCs, not Creditor, to receive the Property.
Third, the Trustee avers, denying conversion would not adversely affect Debtors. They would retain a 160-acre homestead under the Compromise. Debtors would be adversely affected, though, if the Compromise was not approved, the case was converted to Chapter 11, and their plan failed confirmation. The case would either be dismissed or converted back to a Chapter 7, the result being that the Property would be sold at public auction, leaving Debtors with nothing.
B.
The Bankruptcy Code provides that a debtor “may convert” a Chapter 7 case to a case under Chapter 11 “at any time.”
A court ”shall convert” a case under Chapter 11 to Chapter 7 “or dismiss [it], whichever is in the best interests of creditors and the estate, for cause.”
The Trustee contends that the Bankruptcy Court properly denied Debtors’ request to convert to Chapter 11 because “cause” existed to either dismiss the case or convert it back to a Chapter 7, based on “substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.”
We agree. Moreover, as we review below what transpired in this case after the Trustee filed his “Motion and Notice of Compromise” on May 29, 2014, it becomes apparent that other
C.
The bare facts of what transpired make that pellucidly clear. The Trustee negotiated the first draft of the Compromise with Creditor after consulting several real estate brokers and concluding that due mainly to its location and the time it would take to sell it, the Property‘s value was not in the $6 to $12 million range discussed at the February 20 meeting of creditors. Moreover, if sold, a significant capital gains tax would be imposed.52
The Trustee and Creditor solved the problem, placing the well within the 160-acre tract, and submitted a final version of the Compromise to the Bankruptcy Court on August 27. Meanwhile, Debtors had a change of heart. Two investors
had appeared, the LLCs, and expressed an interest in purchasing part of the Property. On August 14, in a document headed “Agreement to Purchase Real Estate,” they submitted an offer to purchase 1,449 acres for $3,334,149. Debtors had until September 5 to accept it. They would do so, on September 1 (the “September 1 Agreement“). Debtors had convinced themselves that Creditor would be willing to take $3,334,149 in full satisfaction of its judgment. They must have been informed that for this to happen, their
Debtors informed Mr. Lanigan of their position on the eve of the August 28 hearing. But they apparently did not tell him about the offer the LLCs had made and that they were going to accept it on September 1. Instead, they told him something else: they had located an investor willing to provide them with the funds necessary to satisfy Creditor‘s judgment in full and pay the costs of the bankruptcy proceeding as well.
Mr. Lanigan acted on this information the moment the August 28 hearing began. He told the Court that “a significant investor . . . is entering into a contract today with Mr. Daughtrey“; he had “spoken directly with all the parties involved.” They represented that the contract would provide all of the funds needed satisfy Creditor‘s judgment “in its entirety.” The Court informed him that in addition to paying Creditor in full, the funds would need to cover “significant administrative costs . . . which are the Trustee‘s quantum meruit compensation and the cost and fees of the Trustee‘s counsel.” Mr. Lanigan said that he had gotten from the Trustee‘s counsel a “preliminary indication as to what those may be” and then “had a very lengthy discussion with [Debtors] and a very direct discussion as to the unequivocal need to pay those, and they acknowledge that. And within the parameters of what‘s being done, the funds will be there to do that.”
The U.S. Trustee‘s counsel objected to Mr. Lanigan‘s plan to convert the case under
The Court accepted Mr. Lanigan‘s representation that Debtors had located an investor who would provide the funds needed to dispose of the case. It therefore continued the hearing to September 25, directing Mr. Lanigan to “get on the phone” with the lawyers for the Trustee and Creditor “and see what can be worked out.” Mr. Lanigan did not follow the Court‘s instruction. There was nothing to work out. The lawyers contacted him, indicating they were “ready to make this happen for you,” but they “heard nothing” in response.
On September 22, Debtors discharged Mr. Lanigan and hired Mr. DeCailly. That same day, Mr. DeCailly moved the Court to convert Debtors’ case to a
Debtors were financially incapable of prosecuting a plan to confirmation and eventual consummation. According to their
At the outset of the hearing, Mr. DeCailly informed the Court that he had just advised the Trustee that the Compromise was out of the question; his clients wanted their case converted to
Mr. DeCailly needed more time. He “ha[dn‘t] had a chance to contact opposing counsel yet regarding the 3 million.” And he “would like to get the full picture of who‘s involved in this case.”
[T]he schedules need to be looked at and they need to be redone. The Court had concern about filing proofs of claim. Well, as we know, if you convert it to 11, we can get a new proof of claim period. All the periods start over again . . . we can go forward [and will] have an opportunity to propose this sale and get the lienholder together with the buyer.
Mr. DeCailly was implying that Debtors’ plan of reorganization depended on whether Creditor and Debtors’ buyer could work out a deal in which Creditor released its lien on all 2,500 acres of the Property, and settled its claim of $4,267,436 for something “up to $3 million.”
The Court found no merit in Debtors’ motion. Debtors had no plan, “no purchase contract,” no “offer . . . on the table today.” Marrama controlled. Mr. DeCailly‘s presentation firmly established that his clients were not eligible to be
D.
The evidence of “cause” for rejecting Debtors’ Motion to Convert is overwhelming. The motion was a sham, farcical on its face, and was filed for the sole purpose of thwarting Creditor‘s effort to obtain satisfaction of its judgment. Debtors had no plan and none on the horizon. Mr. DeCailly chose not to proffer the September 1 Agreement as a plan because it was patently unenforceable; it was illusory. The “earnest money” the LLCs deposited was “$ 0.00,” and they were not obligated to complete the transaction unless they found “financing acceptable to purchaser.” The LLCs could take it or leave it at their own whim. Assuming the Agreement‘s enforceability, Debtors could not deliver a marketable title.
In fact, Debtors’ prospects for producing a plan that could be confirmed were nil. Cause for denying the Motion to Convert therefore existed under
The filing was just one more step in Debtors’ continuing abuse of the bankruptcy process. Their strategy was to delay the process indefinitely. As Mr. DeCailly said at the September 25 hearing, he needed time “to contact opposing counsel . . . regarding that 3 million,” time “to get a full picture of who‘s involved in this case,” and time to look at the schedules because “they need to be redone.” And with conversion to
Section 105(a) of the Code authorized the Court to prevent this kind of intentional abuse of the bankruptcy system by denying the motion.55 See
Marrama, 549 U.S. at 375, 127 S. Ct. at 1112 (concluding that the authority granted to bankruptcy judges under
IV.
Only three grounds are available to support the motion: (1) manifest error of fact; (2) manifest error of law; or (3) newly discovered evidence. A motion for reconsideration is not a vehicle to re-argue issues resolved by the court‘s decision or to make additional argument on matters not previously raised by counsel.
In re Inv‘rs Fla. Aggressive Growth Fund, Ltd., 168 B.R. 760, 768 (Bankr. N.D. Fla. 1994) (citations omitted).
Debtors’ motion was based on two documents that were being disclosed to the Court for the first time, the September 1 Agreement and the October 14 Agreement, both made with the LLCs whose identity was being made known to the Court, the Trustee, the U.S. Trustee, and Creditor also for the first time.
The proposed plan was the October 14 Agreement. The LLCs would purchase all but 160 acres of the Property for $4,621,000. Mr. DeCailly told the Court that the deal could be closed “within 15 days.”58 He said that even though he had
The Court‘s response was that if conversion was granted, the plan Mr. DeCailly outlined would fail, Debtors would be back in
Assuming the Court was treating the motion for reconsideration as a new effort to convert the case to a
V.
Debtors begin their challenge to the Bankruptcy Court‘s Compromise ruling with a question. “The Trustee disposed of $10,000,000.00 worth of prime Florida farm land for $300,000.00 to pay a $2,100.00 unsecured claim, and thousands in administrative expenses, just to give back to the party who paid the $300,000.00 more than 75% of the original money paid. Why?” Debtors’ answer:
It is simple, had the Court just lifted the stay and allowed the secured creditor to proceed with the foreclosure sale, the secured creditors spoils would have been strictly limited to the amount of its judgment, however, by buying $10,000,000.00 worth of property for $300,000.00 the creditor‘s spoils far exceeds what they were actually entitled to under their judgment. It was a brilliant scheme between the Trustee and the Creditor. That is how the Creditor received its windfall, the Trustee also unjustly financially benefited due to the fact that he created a $300,000.00 estate to pay one unsecured creditor with a $2,100.00 claim. Now, the trustee fees are based upon the disbursements to creditors, not on gross assets collected. Therefore, the Trustee traded $10,000,000.00 worth of real estate for $300,000.00 but only had one $2,100.00 unsecured creditor to pay, so he and the creditor cooked up the kickback by including in the compromise a $240,000.00 unsecured claim kick back to the Creditor who paid the
$300,000.00. Now the Trustee can pay his administrative fees, attorney fee, take his bloated trustee fee and give back a large portion of the $300,000 back to the Creditor.
What Debtors seem to be saying is this: in approving the Compromise, the Court allowed Creditor to acquire the property (2,500 acres less 160 set aside for the homestead) for $240,000, i.e., $300,000 less $60,000 for payments to unsecured creditors. Creditor presumably acquired the Property under the Trustee‘s quitclaim deed.60 Instead of approving the Compromise, Debtors continue, the Court should have rejected it and allowed the foreclosure sale to go forward. This, in Debtors’ mind, would have “strictly limited” Creditor‘s “spoils” to “the amount of its judgment.” At the sale, a third party, like the LLCs, would have submitted a bid in an amount in excess of Creditor‘s judgment, thus satisfying the judgment in full.61 The Clerk, in turn, would have given the successful bidder a deed to the Property, all 2,500 acres, rather than carving out 160 acres for the homestead. As the Bankruptcy Court stated at the November 5 hearing, if it did not approve the Compromise, Debtors would be faced with “[t]he foreclosure of the property, so they would have had nothing. They wouldn‘t have had their homestead. They wouldn‘t have had their well.” The District Court agreed.
The Court did lift the stay, but it did so as provided in the Compromise. Creditor could not obtain clear title to the 2,340 acres described in the Trustee‘s quitclaim deed unless the foreclosure sale went forward.62 At the sale, Creditor would presumably bid the amount of its judgment, and if a third party such as the LLCs appeared to bid a sum in excess of that amount, Creditor would wind up with the 2,340 acres conveyed via a deed from the Clerk. At the end of the day, Creditor or a third party would acquire the 2,340 acres, and Debtors would have their homestead. As a matter of conscience if nothing else, the Bankruptcy Court, in the exercise of its discretion, had to approve the Compromise. And the District Court had to approve its decision.
VI.
For all the reasons above, the judgment of the District Court is
AFFIRMED.
Notes
(a) There shall be exempt from forced sale under process of any court, and no judgment, decree or execution shall be a lien thereon, except for the payment of taxes and assessments thereon, obligations contracted for the purchase, improvement or repair thereof, or obligations contracted for house, field or other labor performed on the realty, the following property owned by a natural person:
(1) a homestead, if located outside a municipality, to the extent of one hundred sixty acres of contiguous land and improvements thereon, which shall not be reduced without the owner‘s consent by reason of subsequent inclusion in a municipality; or if located within a municipality, to the extent of one-half acre of contiguous land, upon which the exemption shall be limited to the residence of the owner or the owner‘s family. . . .
The initial motion to which the Compromise was attached stated:Waiver of Defenses to Foreclosure of Remaining Real Property: The Trustee shall waive any and all defenses to the Creditor‘s foreclosure of the Remaining Real Property. This waiver includes the appeal previously filed by the Debtors in the Creditor‘s state court foreclosure action.
In addition, the first supplemented motion for compromise stated:[T]he Trustee agrees (a) to the entry of an order by the Court granting final stay relief to the Creditor to pursue all remedies necessary in the state court action with respect to the Remaining Real Property; and (b) to waive any and all defenses to the Creditor‘s foreclosure of the Remaining Real Property. This waiver includes any rights in the appeal previously filed by the Debtors in the Creditor‘s state court foreclosure action, as such right is held by the Trustee.
The compromise is not simply the transfer of the Real Property but consists of the waiver of the causes of action held by the estate against the Creditor, together with consent to stay relief in favor of the Creditor. [Moreover, t]he Trustee has reviewed the state court foreclosure action and does not believe there is a basis for the appeal of the Judgment.
Georgiana, LLC is a North Carolina manager-managed limited liability company formed December 14, 2010. Its initial members were James P. Burch - who signed the October 14, 2014 Agreement with Debtors, and who is also listed as the registered agent and manager - and William E. Burch, both North Carolina residents. Georgiana, LLC‘s purpose was listed as “Farm” from its inception through March 9, 2016, when the purpose was changed to “Land Investment.” Georgiana, LLC is still listed as active.
(a) The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.
The Closing Date shall be fifteen (15) business days after the entry of the Sale Order, in such a manner as to allow Seller to deliver to Buyer at Closing good, marketable title to the Property as warranted in this Contract, unencumbered by any claims, including but not limited to those of 72 Partners, LLC, and any claims arising out of the transaction pursuant to which Joseph D. Gilberti, Jr. (“Gilberti“) received and recorded a deed to the portion of the Property in Parcel numbers 1009-00-1000 and 1011-00-1010, and any other claims of Gilberti or Gilberti Water Company, or any other party or entity related or associated with any of the parties mentioned above or any other claimants.The transaction could not close without the cancelation of the deed to Gilberti and the removal of liens he recorded to secure upwards of $70 million of claims. Otherwise, Debtors could not deliver good, marketable title to the Property.