Townside Construction, Inc.
MEMORANDUM OPINION
The matter before the Court is the Joint Motion for Authority to Compromise and Settle a Dispute and to Sell Certain Property of the Estate (the “Motion“).1 The Motion was filed by William E. Callahan, Jr., Trustee in each of the above referenced bankruptcy cases (the “Trustee“); Pinnacle Bank (“Pinnacle“), successor to Bank of North Carolina (“BNC“) and to Valley Bank; and Moss & Rocovich, Attorneys-at-Law, P.C. (the “Foreclosure Trustee“). The Trustee, Pinnacle, and the Foreclosure Trustee are collectively referred to herein as the “Movants.”
FACTUAL AND PROCEDURAL BACKGROUND
The pertinent facts in the case are largely undisputed.2 Townside Construction, Inc. (“Townside“) filed a voluntary petition for relief in this Court under
Pinnacle is and has been at all relevant times a creditor of the Debtors. The Debtors were owners and developers of certain real property in the City of Roanoke and the County of Roanoke. Townside is indebted to Pinnacle as evidenced by the following promissory notes: (1) a note dated September 24, 2004, as modified or amended, in the original principal amount of $850,000.00 (“Note 1“), (2) a note dated September 24, 2004, as modified or amended, in the original principal amount of $900,000.00 (“Note 2“), and (3) a note dated December 21, 2012, as modified or amended, in the original principal amount of $1,250,000.00 (“Note 3“). As alleged in Pinnacle‘s Motion for Relief, the unpaid balances on the notes as of May 6, 2016 were as follows: $898,443.95 on Note 1, $704,204.16 on Note 2, and $621,651.88 on Note 3.
To secure repayment of obligations evidenced by the notes, Townside and Landmark pledged certain real property pursuant to deeds of trust as follows: (1) a Credit Line Deed of Trust dated September 24, 2004 in the maximum principal amount of $4,000,000.00 granted by Townside and Landmark on 124.37 acres, Cherokee Hills West, in Roanoke County, Virginia, (2) a Credit Line Deed of Trust dated September 24, 2004 in the maximum principal amount of $600,000.00 granted by Townside on 711 5th Street, in the City of Roanoke, Virginia, and (3) a Credit Line Deed of Trust dated April 26, 2006 in the maximum principal amount of $600,000.00
Townside and Landmark each agreed to consent to relief from stay as to Pinnacle if they could not obtain confirmation of a
Pinnacle thereafter moved to foreclose much, but not all, of the Debtors’ remaining real property pledged as collateral to the Bank. Foreclosure sales were conducted on February 9, 2017 and May 23, 2017 (the “Foreclosure Sales“).4 The only real estate owned by Townside which has not been subjected to a completed foreclosure is Lot 49, Section 4, Cherokee Hills (“Lot 49“). Lot 49 is an unbuildable parcel which contains certain drainage facilities necessary for further development of the Cherokee Hills subdivision. The high bidder on two separate parcels at the February 9, 2017 Foreclosure Sale was Pinnacle.5 The high bidder on five parcels (the “Five Reynolds Tracts“) and five lots (the “Cherokee Hills Lots“) included in the May 23, 2017 Foreclosure Sale was Pinnacle as well. The high bidder on an acreage tract (the “Acreage Tract“) included in the May 23, 2017 Foreclosure Sale was R. Fralin Companies, Inc., which assigned its rights in the property to RFC2017 Land, LLC. The latter tract sold at foreclosure for $432,000.00.
Neither Townside nor Landmark listed the indebtednesses due to Pinnacle, then BNC, in their schedules as contingent, liquidated, or disputed. Further, neither Townside nor Landmark filed any schedules in either case disclosing any causes of action against Pinnacle or its predecessors in interest as a property interest. No
I. The First State Court Lawsuit
Without the participation of the Trustee, the Debtors filed a state court lawsuit against Pinnacle and the Foreclosure Trustee on or about July 31, 2017, in the Circuit Court for the County of Roanoke, Virginia (the “First Lawsuit“). On August 1, 2017, in conjunction with the filing of the First Lawsuit, the Debtors’ counsel in the state court litigation filed a Memorandum of Lis Pendens in the Clerk‘s Office of the Circuit Court for the County of Roanoke. Pinnacle removed the First Lawsuit to this Court on August 22, 2017. Townside, ECF No. 131.
The First Lawsuit dealt solely with the then pending foreclosure of Lot 49. The Debtors alleged that the proposed foreclosure sale should not go forward because the sale was not properly advertised, the notice of the sale was not properly mailed to the plaintiffs, and that the Foreclosure Trustee did not fulfill its duties to the parties pursuant to the relevant deeds of trust. The sale did not go forward, having been cancelled by either the Foreclosure Trustee or the Bank. Instead, since the Landmark case was closed on July 20, 2017, Pinnacle moved to re-open the case, and on October 18, 2017 the Trustee, Pinnacle and the Foreclosure Trustee moved for the entry of a settlement agreement in connection with Lot 49.
The terms of the proposed settlement are summarized as follows: (1) Pinnacle will pay $29,500.00 to the Trustee after the entry of a final and non-appealable order approving the settlement. In exchange for the settlement funds, (1) the Trustee will convey Lot 49 by Special
Warranty Deed and the Declarant Rights in the Cherokee Hills development by Special Warranty Bill of Sale to Pinnacle or its designee. (2) The Trustee will execute a “mutual general release” of Pinnacle, the Foreclosure Trustee, and their respective related entities by which the Trustee will release the released parties from all claims against them, whether asserted or not, by Townside and Landmark and further confirm that the Debtors’ respective estates retain no lien, claim, interest, right, or ownership in any of the real property foreclosed pursuant to the Foreclosure Sales. (3) At settlement, the Trustee, on behalf of the Debtors’ estates, and their respective officers, directors, successors, assigns, affiliates, agents, heirs, and legal representatives, will release Pinnacle and the Foreclosure Trustee along with their respective officers, directors, agents, and others from any and all claims, demands, causes of actions, whether known or unknown, and “accruing from the beginning of time through the date of the entry of the Approval Order.” Townside, ECF No. 137. The release is intended to include, but not be limited to, any and all matters pertaining to Lot 49, but also to any of the Foreclosure Sales and any matters asserted in the First Lawsuit. Id.
II. The Second State Court Lawsuit
Prior to the hearing on the Motion, on or about November 17, 2017, the Debtors filed a second state court lawsuit against Pinnacle, the Foreclosure Trustee, Robert Fralin (“Fralin“), and RFC2017 LAND, LLC in the Circuit Court for the County of Roanoke, Virginia (the “Second Lawsuit“). In conjunction with the filing of the Second Lawsuit, the Debtors’ counsel in the state court litigation filed a Memorandum of Lis Pendens in the Clerk‘s Office of the Circuit Court of Roanoke County. Pinnacle removed the Second Lawsuit to this Court on December 12, 2017. Townside, ECF No. 145.
III. The Joint Settlement Motion
On November 20, 2017, the Court held a hearing on the Motion. At that time, the Second Lawsuit had only just been filed, and a copy of the complaint in that lawsuit was filed with the Court on November 17, 2017. Townside, ECF No. 140-1. The Court expressed its concern at the November 20, 2017 hearing as to whether a sufficient record existed to determine (1) whether the causes of actions asserted in the lawsuits were property of the various estates, and (2) if so, whether the settlement proposed was fair and reasonable. The Trustee made clear his position that any causes of action arising from or in connection with the foreclosures of estate property were property of the estates, and further asserted that neither the Debtors’ bankruptcy counsel nor its litigation counsel had obtained his authorization to file either lawsuit, with or without his participation. Both Debtors’ bankruptcy and litigation counsel assert that the causes of action alleged are not property of the estates and that they are free to bring the litigation on behalf of the Debtors without the Trustee‘s involvement or participation. The Trustee conceded he has an obligation to investigate the merits, if any, of the litigation if it was property of the estates. As a result, the Court asked for further briefing, and the parties also agreed to submit a stipulation of facts. The parties have fully briefed the matter and the Stipulation has been filed.
Citing Segal v. Rochelle, 382 U.S. 375, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966), the Debtors now concede that the claims alleged in their Second Lawsuit for invasion of privacy and breach of fiduciary duty against Pinnacle are “sufficiently rooted” in the Debtors’ pre-petition past to warrant dismissal on standing grounds as these claims are based on Pinnacle‘s alleged improper disclosure of the Debtors’ loan information in advance of their bankruptcy filings. The Movants assert that all causes of action in both state court actions are property of the Debtors’ respective estates, and thus are subject to settlement by the Trustee.
CONCLUSIONS OF LAW
I. Jurisdiction and Venue
This action arises under
II. The Statutory Framework
“Whether an asset is property of the estate is a legal determination which frequently entails complex analyses involving a number of legal elements and a variety of facts.” In re Chesnut, 422 F.3d 298, 303 (5th Cir. 2005).7
“Congress intended that courts broadly construe the scope of
III. Segal v. Rochelle
A more difficult question arises when a property interest reveals itself to have both existence and value after the commencement of the case. In that circumstance, the question becomes whose asset is it? Is it an asset of the estate or an asset of the Debtor? Also difficult is when only partial aspects or glimpses of the potential asset present themselves pre-petition, and the balance come to light much later. In Segal, the Supreme Court considered, under the former Bankruptcy Act, whether or not the debtors’ claims for loss-carryback tax refunds were property of the debtors’ bankruptcy estates or property of the individual debtors. Under the tax laws, the loss-carryback refunds claims could only be asserted when the tax year had closed, which was post-petition in each debtor‘s case. Thus, the tax refunds in Segal were sought and received after the bankruptcy filings. After analyzing the relevant Bankruptcy Act provision and its broad inclusion language, and observing that taxes were paid on net income in prior years and that the year of bankruptcy exhibited a net operating loss, the Court concluded that the loss-carryback refunds were “sufficiently rooted in the pre-bankruptcy past . . . that [they] should be regarded as ‘property‘” under the Bankruptcy Act. 382 U.S. at 380, 86 S.Ct. at 515. Notwithstanding the subsequent enactment of the Bankruptcy Code, Segal remains good law in this Circuit. Jenkins v. A.T. Massey Coal Co., Inc. (In re Jenkins), 410 B.R. 182, 189 (Bankr. W.D. Va. 2008) (citing Andrews v. Riggs National Bank (In re Andrews), 80 F.3d 906 (4th Cir. 1996)). In Andrews, the Fourth Circuit found that post-petition payments under a pre-petition noncompetition agreement were property of the estate. Andrews, at 910-11. The Fourth Circuit applied the Segal test again after Andrews in Bearman v. Shearin (In re Shearin), 224 F.3d 346 (4th Cir. 2000). There, the question again arose whether assets which were received post-petition were sufficiently rooted in the debtor‘s pre-bankruptcy past to be included as property of the estate. In Shearin, the Fourth Circuit concluded that the portion of a debtor‘s year end distribution of partnership profits earned pre-petition was property of the estate even though such distribution did not occur until after the commencement of the case. Id. at 351-52.
IV. Application of Section 541(a) and Segal to this Case
The Debtors’ collective position in this case is fairly straightforward. They have no objection to the Motion to the extent that it contemplates a sale of assets and/or release of claims that are property of the Townside and Landmark bankruptcy estates. Debtors’ Response, Townside, ECF No. 139, p. 2 and Landmark, ECF No. 98. However, the Debtors object to any such releases being applicable to post-petition causes of action that are not property of the Debtors’ estates. Simply put, the Debtors contend that “the actions contemplated to be released, which arise from post-petition foreclosure sales conducted by Pinnacle Bank,” and, quoting Segal, “conduct associated with the post-petition foreclosure sales, have nothing to do with
In this case, the stipulated facts establish that the Debtors and Pinnacle, through its predecessor banks, had a long relationship pre-petition, dating back to 2004 when the first loans evidenced by the notes and secured by the deeds of trust were made. Clearly, the relationship became rocky, in part because of the housing downturn suggested by Jerry Grubb‘s letter to BNC on behalf of Townside dated January 11, 2016, and as set forth in the Debtors’
I got a call last week from Mr. Robert Fralin, a local/builder developer, and a major client of your bank. Our initial conversation focused on his interest in my development. He made me an offer I could not accept. I asked him not to contact my bank but he indicated that he was going to and I suppose to try [to] make a direct back door offer undermining my ability to negotiate a settlement with BNC. He told me that an appraiser told him about my project, but I called every appraiser that had anything to do with my project for the last 2 years and they all vehemently denied talking to him. This had to come from someone at the bank. This is exactly what happened on my office building and I will not tolerate it again. I realize that I‘m not in a strong position but this is wrong and probably illegal. My offer still stands, and in fact my investors have indicated that they would entertain a counter offer from the bank.
Townside, ECF No. 140, Ex. C to Second Lawsuit.
Whether the allegations in the above referenced letter are true or not is not a question presently before the Court. However, they are insightful for several reasons. At least as early as February 2016, Townside had suspicions that Pinnacle was communicating with other bank customers about its loans with Pinnacle, not only in connection with the Cherokee Hills project, but also in connection with the sale of the 5th Street Building. Townside did not file its bankruptcy petition until May 6, 2016. It stayed in
Further, on May 23, 2017, the foreclosure sale about which the Debtors complain in the Second Lawsuit took place. It was up to and at that sale that Pinnacle and Fralin are alleged to have engaged in collusion, witnessed by representatives of the Debtors. The meeting of creditors in the Debtors’ cases did not take place until June 16, 2017. None of the Debtors’ suspicions
The Court further notes these are corporate debtors, not individuals. They will receive no discharge in
CONCLUSION
The only matter the Court decides today is whether the causes of action asserted by Townside and Landmark in the two state court lawsuits are property of their
An appropriate Order shall issue.
Decided this 14th day of March, 2018.
UNITED STATES BANKRUPTCY JUDGE