Trust F/B/O Dianne Rose v. LevineTrust F/B/O Dianne Rose v. Levine
- Reporters:
- Before:
- Geoffrey W. Crawford
(Doc. 1 in No. 2:23-cv-4 and in No. 2:23-cv-5)
In this pair of bankruptcy appeals, appellant Trust f/b/o Dianne Rose u/a dtd 9/12/02 (the “Rose Trust“) seeks reversal of the Bankruptcy Court‘s Order dated December 20, 2022, disallowing the Rose Trust‘s claims against debtors Stone Wolf Capital Management Co. and Pekin Brook Farm, LLC. (Doc. 2-38). The Rose Trust asserts that it made numerous disbursements to Dianne Rose‘s son Paul Rose and to Virginia Kern, GP Land Management, LLC, and Pekin Brook Farm, LLC (“Pekin Brook“) to fund construction and development of an organic farm in East Calais, Vermont. The Rose Trust further asserts that Pekin Brook promised to repay those disbursements, as evidenced by a $752,500 promissory note. On appeal, the Rose Trust argues that the Bankruptcy Court should have found that the promissory note is an enforceable negotiable instrument under Delaware‘s version of the Uniform Commercial Code and that the Rose Trust is entitled to enforce the note.
The court heard oral argument on the appeals on July 19, 2023. For the reasons that follow, the court reverses the decision of the Bankruptcy Court disallowing the claim arising from the Pekin Brook promissory note on the ground of lack of consideration. The note was supported by consideration in the form of antecedеnt debt, including credit extended to third parties as well as directly to Pekin Brook. Under the Delaware provisions of the UCC, these prior advances are sufficient consideration to support a subsequent note. The court also concludes that the matter should be remanded to allow consideration of the trustee‘s separate claim for recharacterization of the debt evidenced by the Pekin Brook note.
This court has jurisdiction under
Facts1
The court draws the facts primarily from the Bankruptcy Court‘s findings of fact (A0005–A0007), with citations to the record on appeal as appropriate.2 Except as otherwise noted, the Rose Trust does not challenge any of the Bankruptcy Court‘s factual findings. While the factual background of this case is extensive, the court recites only those facts necessary to resolve these appeals.
In 2012, Paul Rose purchased undeveloped, unimproved forested property at 480 Pekin Brook Road in East Calais, Vermont. (See A0529, A0533–0535.) The property was deeded in the name of his then-girlfriend, Virginia Kern. (See A0107 (referencing deed “recorded July 10, 2012 in Vol. 40, Page 630 of the Town of Calais Land Records“); A0535.) Paul and Virginia3 intended to establish a farming operation at the property. (See A0536.)
Paul and Virginia were not able to obtain conventional financing for establishment of the farm. According to the testimony of Paul‘s mother, Dianne Rose, Paul asked her to loan him the funds. (Bankr. Doc. 134 at 105.) Dianne Rose testified that she is a beneficiary and a trustee of
Disbursements from the Rose Trust over the course of several years between 2012 and 2015 financed the clearing of the land and construction and development at the 480 Pekin Brook Road property. According to a disbursement schedule prepared by Dianne Rose, she approved the transfer of a total of $752,500 via more than 40 transactions between February 2013 and November 2015. (A0221.) The disbursement schedule lists Virginia Kern or Paul Rose as the recipients of those transfers until mid-Sеptember 2014 (totaling $327,500).4 (Id.) Dianne Rose testified that, in her view, the Rose Trust was “lending” money to “the farm” and that “when they started having revenues, [they] would pay it back.” (A0566; see also A0564.)
In addition to the financial assistance from the Rose Trust, Paul‘s father, Herbert Rose, assisted with “hands-on” teaching and with the “business aspect” of the farm. (A0534–0535.) Herbert Rose and Dianne Rose divorced in the 1980s. (See A0562.) Herbert Rose testified that he regarded the disbursements from the Rose Trust as a loan to Paul. (A0536.)
In early 2014, Paul and Virginia formed GP Land Management, LLC (“GPLM“) to manage and maintain the Pekin Brook Road property. GPLM‘s operating agreement identified Virginia Kern and Herbert Rose as the LLC‘s two members and as co-managers. (Doc. 2-73 at 338, 340.) In August 2014, Virginia conveyed the 480 Pekin Brook Road property to GPLM by quitclaim deed. (See Bankr. Doc. 96-12 at 16.) Dianne Rose‘s disbursement schedule shows that, between September 2014 and June 2015, transfers from the Rose Trust went to GPLM. (A0221.) The final transfer to GPLM was for $40,000 on June 5, 2015; the total transferred to GPLM was $272,000. (Id.)
In 2015, Virginia severed her personal and business ties with Paul and with the farm. (See A0538–0539; A0577; T068–069.) The breakup was sudden. (A0539; A0577.) No evidence indicates that Virginia took any action to assign her membership interest in GPLM.
In his capacity as managing member of GPLM, Herbert Rose signed a Promissory Note dated June 5, 2015 (the “GP Note“) memorializing the LLC‘s promise to рay the Rose Trust the principal amount of $602,500, with interest at 2.75% per year, compounded annually. (A0210–0215.) The GP Note specified that, absent an uncured or waived event of default, the principal and interest would be due on June 30, 2017. (A0211.) The $602,500 figure represented the sum of transfers from the Rose Trust to Virginia, Paul, and to GPLM through June 5, 2015, as those transfers appeared on a schedule attached to the GP Note. (A0215.)5 The GP Note included a choice-of-law provision stating that Delaware law would govern. (A0214.) The GP Note was not secured by a mortgage on the 480 Pekin Brook Road property. (See T066.) No payments were ever made on the GP Note.
On July 14, 2015, Herbert Rose formed Pekin Brook Farm, LLC (“Pekin Brook“) as a new entity to manage and maintain
On September 30, 2015, Herbert Rоse signed a “certificate of resolution” for GPLM. He testified that the purpose of that document was to remove Virginia Kern from GPLM. (A0538.) The certificate of resolution also authorized the transfer of GPLM‘s assets to Pekin Brook. (See A0006; A0540.) The resolution is silent regarding any liability to the Rose Trust or otherwise. (See A0006.) Herbert Rose also caused GPLM to convey the 480 Pekin Brook Road property to Pekin Brook by quitclaim deed dated September 30, 2015. (See A0039 (referencing Vol. 47, Page 117 of the Town of Calais Land Records).) According to Herbert Rose, GPLM was, at that point, “dissolved.” (A0544.)6
In a letter dated July 15, 2017 and signed on behalf of the Rose Trust by Dianne Rose, the Rose Trust advised Herbert Rose, as the managing member of GPLM, that the GP Note was “due and payable in full with accrued interest as of June 30, 2017.” (A0459.) The letter further stated:
Please remit payment of the principal balance of $602,500, plus accrued interest to date. I have previously contacted you about the impending payment and have not received any confirmation or an estimated payment date. So please confirm receipt of this letter and let me know when the LLC will make payment.
(Id.) Herbert Rose responded in a letter that he signed as managing member of GPLM dated December 15, 2017:
I [аm] writing to inform you that I have received your multiple requests for repayment of the Promissory Note from [GPLM] to the Trust FBO Dianne Rose u/a dtd 9/12/02. Unfortunately, repayment will not be forthcoming as the business venture failed to generate any cash flow and [GPLM] was dissolved. Since the Promissory Note was only executed by [GPLM] without any guaranties, you have no recourse for payment and the Promissory Note is essentially worthless.
(A0461.) Dianne Rose testified that attorney Ronald Pohl prepared both the July 2017 letter and the December 2017 response. (T054.)
Although the timing is not exactly clear, Paul met Cella Bernier in or about 2017. (See T163; Bankr. Doc. 135 at 108.) According to her testimony, she and Paul began dating, and she became involved in the farm and supported Paul‘s plan to start a farm-to-table restaurant. (Bankr. Doc. 135 at 109.) Sometime after meeting Cella Bernier—also in or about 2017—Paul was diagnosed with cancer. (A0547; Bankr. Doc. 135 at 109.) He and Cella Bernier married after his cancer diagnosis; she took his last name. (See Bankr. Doc. 135 at 109.) After sustaining a work injury, Cella Rose convinced Paul to drop the restaurant project. (Id.) In 2018—after finding that cannabidiol (CBD) relieved many of the symptoms from chemotherapy and radiation
Herbert Rose‘s wife passed away on April 14, 2018 after a 2014 lung cancer diagnosis and treatment and then complications in 2018 from influenza and pneumonia. (A0546.) He testified that he was not interested in being involved with the new CBD business. (A0548.) He took several actions as he reduced his connections to the farm.
First, on behalf of Pekin Brook, Herbert Rose signed a “Promissory Note” dated July 1, 2018 (the “PB Note“) memorializing Pekin Brook‘s promise to pay the Rose Trust the principal amount of $752,500, with interest at 2.87% per year, compounded annually. (A0217–A0221.)7
In particular, the PB Note states: “PEKIN BOOK FARM, LLC (the ’Issuer‘), for value received in accordance with the schedule of payments annexed hereto, hereby promises to pay to the order of the TRUST FBO DIANNE ROSE U/A DTD 9/12/02 (the ”Holder“) the principal amount of $752,500.” (A0217.) The PB Note specified that, absent an uncured or waived event of default, the principal and interest would be due on June 30, 2023. (Id.)
The $752,500 figure represented the sum of transfers from the Rose Trust to Virginia, Paul, GPLM, and Pekin Brook (including all of the transfers that were at issue in the GP Note) through November 9, 2016. All of these transfers appeared on a schedule attached to the PB Note. (A0221.)8 Like the GP Note, the PB Note included a choice-of-law provision stating that Delаware law would govern. (A0220.) The PB Note was not secured by a mortgage on the 480 Pekin Brook Road property. Herbert Rose testified that he signed the PB Note because he believed Pekin Brook owed the money to the Rose Trust and that the indebtedness needed to be documented. (A0549.)
Second, Herbert Rose signed a “Membership Interest Transfer Power” document dated July 6, 2018.9 (Doc. 2-73 at 212.) That document stated that Herbert Rose assigned and transferred “all the outstanding membership interests (the ‘Membership Interest‘) in Pekin Brook Farm, LLC . . . to Paul Rose.” (Id.) The document also included Herbert Rose‘s representations that the Membership Interest was “freely transferable and unencumbered” and that “no other person or entity has any interest in the Company.” (Id.)
In 2018, Paul Rose retained attorney Richard W. Moulton, III to help with business formation tasks. (T073.) Attorney Moulton‘s work included helping Paul to “engage in a private placement to sell securities to investors to raise capital for his business.” (T074.) Attorney Moulton testified that Paul identified a group of investors from Florida whо were interested in financing the business: Greg Eversole, Herbert Deuschel, and Sacha and Abigail DuBearn. (T076–T077.) Dianne Rose and Herbert Deuschel met in 2017 or 2018, and Dianne Rose hired Mr. Deuschel and his firm to do consulting and tax work for her. (T100.) Mr. Deuschel testified that, as he worked on Dianne Rose‘s taxes, he discussed the GP Note and how, by having a written document on which payments were made, Dianne Rose could take a “bad debt” tax loss. (T107.)
Dianne Rose also mentioned to Mr. Deuschel that her son, Paul, was looking for investors. Mr. Deuschel relayed that message to his clients, Greg Eversole and Sacha and Abigail DuBearn. (A0558.) Greg Eversole workеd for the DuBearns’ Florida-based hemp cultivation company. (T132.) Mr. Eversole and the DuBearns reviewed the Stone Wolf business plan and visited the Stone Wolf property in Vermont. (See T135–T136.) They hired a law firm to assist in their “due diligence” process. (Doc. 2-73 at 10.) Mr. Eversole testified that they felt comfortable investing in Stone Wolf based on their understanding that Paul had already invested more than $1 million and that he owned the company “free and clear.” (T143.) On or about April 10, 2019, Mr. Eversole‘s company and Abigail and Sacha DuBearn (the “Florida Investors“) invested approximately $1 million in Stone Wolf. (See Doc. 2-73 at 221–275 (stock purchase agreemеnt).) Paul Rose never disclosed the PB Note to the Florida Investors.
The relationship between Paul Rose and the Florida Investors soon deteriorated. The Stone Wolf principals decided that the best course of action would be to file an assignment for the benefit of creditors for both Stone Wolf and Pekin Brook. Paul Rose and the Florida Investors executed General Assignments dated November 20, 2019. (See Doc. 2-73 at 167–176.) A schedule of financial obligations attached to the General Assignment did not list the Rose Trust as a creditor of Stone Wolf or Pekin Brook. (Id. at 175.)
Paul Rose passed away in December 2019. The Rose Trust аsserted a right to payment after Paul‘s death. The debtors filed for bankruptcy in June 2020 through the assignee. (Doc. 2-9.) The assignee caused Stone Wolf and Pekin Brook to file for Chapter 7 bankruptcy in June 2020. (See Doc. 2-9.) The Rose Trust filed proofs of claim in both bankruptcy cases in September 2020 claiming to be a creditor based on the PB Note. (Doc. 2-20 at 26–33.) The Chapter 7 Trustee objected to those claims (A0116) and the Bankruptcy
The Bankruptcy Court‘s Decision
The decision of the Bankruptcy Court recognized the stipulation of the parties that the Rose Trust made the payments described in the disbursement schedule and that the claims were “prima facie valid.” The court recognized that Delaware law governed the validity of these claims. Applying Delaware decisional law concerning the requirement of consideration in the formation of an enforceable contract, the court concluded that there was neither written evidence of a transfer of debts owed by Paul, Virginia, or GPLM to Pekin Brook nor a showing of the payment of new consideration to support the PB Note. (A0010.) The court held that “[c]onsideration for the Pekin Note cannot be built upon a commitment to honor a pre-existing obligation as it is deemed neither benefit nor detriment.” (A0011 (citations omitted).) Because the PB note was unenforceable for lack of consideration, the court disallowed the claim against Pekin Brook in its entirety.
The Bankruptcy Court also disallowed the claim against Stone Wolf due to a lack of evidence that would render Stone Wolf liable for the debt of its subsidiary. (A0012.) The Rose Trust did not appeal this aspect of the decision.
Analysis
The Rose Trust requests that the district court reverse the Order “only in part, as to the Rose Trust‘s claim against Pekin Brook.” (Doc. 3 at 8.) The Rose Trust argues that the Bankruptcy Court erred because: (1) it should have found the PB Note to be an enforceable promissory note under the UCC; (2) it failed to construe the PB Note as a whole; (3) it failed to recognize that the PB Note itself is the writing needed to evidence Pekin Brook‘s assumption of the obligation to repay the disbursals;10 (4) the PB Note is enforceable as to the $150,000 disbursed directly to Pekin Brook because the UCC specifically allows pre-existing obligations to serve as consideration for negotiable instruments; and (5) even if disbursals to Pekin Brook were “past consideration,” the PB Nоte is still a valid contract supported by consideration under Delaware contract law. (See Doc. 3.)
I. UCC Analysis
Article 3 of the UCC governs the enforcement of promissory notes and other negotiable instruments. Two provisions of Article 3 govern this case. Delaware has adopted both.
Section 3-104 of Title 6 of the Delaware Code defines the requirements for negotiable instruments, including promissory notes. As relevant here, these include an unconditional promise to pay a fixed amount of money on demand or at a particular time and without further conditions beyond repayment. The PB Note meets these statutory requirements and qualifies as a negotiable instrument subject to the other provisions of Article 3.
Section 3-303 of Title 6 of the Delaware Code governs the requirement of consideration. It provides in full:
(a) An instrument is issued or transferred for value if:
(1) The instrument is issued or transferred for a promise of performance,
to the extent the promise has been performed; (2) The transferee acquires a security interest or other lien in the instrument other than a lien obtained by judicial proceeding;
(3) The instrument is issued or transferred as payment of, or as security for, an antecedent claim against any person, whether or not the claim is due;
(4) The instrument is issued or transferred in exchange for a negotiable instrument;
(5) Thе instrument is issued or transferred in exchange for the incurring of an irrevocable obligation to a third party by the person taking the instrument.
(b) “Consideration” means any consideration sufficient to support a simple contract. The drawer or maker of an instrument has a defense if the instrument is issued without consideration. If an instrument is issued for a promise of performance, the issuer has a defense to the extent performance of the promise is due and the promise has not been performed. If an instrument is issued for value as stated in subsection (a), the instrument is also issued for consideration.
Two provisions are relevant here.11 The first is § 303(a)(3) that defines “value” to include “payment of, or as security for, an antecedent claim against any person, whether or not the claim is due.” The second is the final sentence in § 303(b) stating that “value” and “consideration” have the same meaning for determining whether an instrument is issued for consideration. Section 303(b) incorporates the definition of value in § 3-303(a) into the definition of consideration.12
In defining “value,” Section 3-303(a)(3) specifically includes issuance of a negotiable instrument in payment or as security for an antecedent claim against any person. That is exactly what has occurred in this case. The Rose Trust held an antecedent claim against Paul, Virginia, GPLM and Pekin Brook for the payments it made to them. Whether the members of the Rose family understood that Paul meant to repay his mother from his own funds or through income received by GPLM or, later, Pekin Brook is a matter of dispute. Testimony from Dianne was not always precise about the distinction between her son as an individual and the corporations which owned and operated the farm. See Trustee‘s Memorandum at 12. What is not in dispute is that the Rose Trust obtained promissory notes, first from GPLM and later from Pekin Brook, promising repayment. Consideration for the PB Note was presеnt because the Rose Trust had previously made payments to various parties and held an antecedent claim for repayment of these advances.
The official comment to § 3-303 provides a relevant example:
Case #1. X owes Y $1,000. The debt is not represented by a note. Later X issues a notе to Y for the debt. Under subsection (a)(3) X‘s note is issued for value. Under subsection (b) the note is also issued for consideration whether or not, under contract law, Y is deemed to have given consideration for the note.
Case law applying the UCC as adopted in various states reaches the same conclusion. See In re Bedrock Mktg., 404 B.R. 919, 941 (2009)(“The Defendant is correct in his assertion that as a general rule and in the absence of a statute validating past consideration, past consideration is insufficient to support a promise. However, there is such a statute validating past consideration for negotiable instruments in Utah. [Citing Utah‘s version of UCC § 3-303]“); St. Paul Fire & Marine Ins. Co. v. State Bank of Salem, 412 N.E.2d 102 (Minn. Ct. of App. 1980)(“[Section 3-303(b) plainly states that value is given for an instrument when the instrument is taken in payment for аn antecedent debt not yet due.“);
As this discussion is intended to illustrate, the requirement of consideration in Article 3 of the UCC is more specific than the general requirement in contract law that consideration rests upon a benefit to the promisor or some detriment to the promisee. If the promissory note meets the definition of a negotiable instrument—as the note in this case does—it is sufficient to demonstrate consideration through the reference to an antecedent debt owed to the holder of the note. The antecedent debt does not have to be owed by the maker. It does not hаve to be discharged when the maker signs the note. Consideration is present because the Rose Trust held an antecedent claim for its prior advances for which it obtained additional security through the PB Note. Nothing more is required to establish consideration.13
The court reverses the decision of the Bankruptcy Court because it did not apply the Delaware version of the Uniform Commercial Code to the Trustee‘s assertion that the PB Note was unenforceable for lack of consideration.
II. Disposition
The Rose Trust requests that the district court allow the Rose Trust‘s claim
The Chapter 7 Trustee argues that the district court can affirm the Bankruptcy Court on alternative grounds “by recharacterizing the claims filed by the Rose Trust as equity.” (Doc. 5 at 33.) Such recharacterization cannot be a basis for disallowing the Rose Trust‘s claim. See In re LATAM Airlines Grp. S.A., No. 20-11254, 2022 WL 1295928, at *12 (Bankr. S.D.N.Y. Apr. 29, 2022) (“Application of the doctrine of recharacterization does not provide a basis for disallowing a claim; it is a separate and distinct inquiry from disallowance under section 502(b)(1).“). But recharacterization would favor the Florida Investors who advanced money to Stone Wolf because its effect “is subordination of the claim as a proprietary interest because the corporation repays capital contributions only after satisfying all other obligations of the corporation.” Id. (quoting In re AutoStyle Plastics, Inc., 269 F.3d 726, 749 (6th Cir. 2001)).
Noting that the Chapter 7 Trustee did not request recharacterization as to Pekin Brook Farm, LLC in the Bankruptcy Court procеedings, the Rose Trust contends that the recharacterization argument fails for five reasons:
1) it is procedurally improper as it is raised for the first time in the Opposition; 2) it is not presented on cross-appeal; 3) it is not supported by law or findings in the Order—which did not reach recharacterization; 4) recharacterization of the Rose Trust‘s Pekin Brook claim is not an argument the Bankruptcy Court could have addressed or considered because it was not raised prior to its present inclusion in the Opposition; and, 5) the Bankruptcy Court did not invoke its
11 U.S.C. § 105 authority in the Order.
(Doc. 7 at 5.) Those may all be good reasons for the Bankruptcy Court to decline to recharacterize the PB Note. The district court expresses no view on this issue. The district court remands the case so that these issues may be fully developed and decided by the Bankruptcy Court in the first instance.
Conclusion
The Rose Trust does not seek reversal or any other action or remedy as to debtor Stone Wolf Capital Management Company in the appeal docketed No. 2:23-cv-4. (See Doc. 3 at 8.) That appeal is accordingly DISMISSED as MOOT.
In the appeal as to debtor Pekin Brook Farm, LLC, No. 2:23-cv-5, the Bankruptcy Court‘s Order as to the Rose Trust‘s claim against Pekin Brook Farm, LLC is REVERSED and the matter is REMANDED for further proceedings consistent with this decision.
Dated at Rutland, in the District of Vermont, this 17 day of August, 2023.
Geoffrey W. Crawford, Chief Judge
United States District Court