Cecil Daughtrey, Jr. v. Luis E. Rivera, II ( 2018 )

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[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 15-14544
________________________
D.C. Docket No. 2:15-cv-00029-JES; 8:13-bkc-14831-FMD
In re: CECIL DAUGHTREY, JR.,
PATRICIA A. DAUGHTREY,
Debtors.
__________________________________________________________________
CECIL DAUGHTREY, JR.,
PATRICIA A. DAUGHTREY,
Plaintiffs-Appellants,
versus
LUIS E. RIVERA, II,
Defendant-Appellee.
________________________
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.
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TJOFLAT, Circuit Judge:
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 11 U.S.C.
§ 362(a), the trustee of the bankruptcy estate and the judgment creditor, 72
Partners, LLC, entered into a compromise agreement that would grant 72 Partners
all of the property except for a portion the Daughtreys would retain as their
homestead. The Daughtreys objected to the compromise agreement and moved the
Bankruptcy Court to convert their Chapter 7 case to a Chapter 11 proceeding on
the representation that the property (with the exception of the homestead) could be
sold for a sum substantially in excess of the judgment. The Court, concluding that
the Daughtreys could not qualify as Chapter 11 debtors, denied their motion and
approved the compromise agreement.
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.
2
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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.
1
Mr. Daughtrey received the Property from his father’s estate on November 8, 1991.
“Personal Representative’s Distributive Deed,” Sarasota Cty. Official Records, Book 2343 pp.
500–02, available at https://www.sarasotaclerk.com/OfficialRecords.aspx. The record indicates
that the Property consisted of a fraction less than 2,500 acres. For convenience, we treat the
Property as consisting of 2,500 acres.
3
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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 without them, 5 and the Court,
2
Verified Complaint, BSLF v. Cecil Daughtrey, Jr., et al., Case No. 2011-CA-4209 NC.
Some of the pleadings in the case are contained in the record of the instant bankruptcy case. The
clerk’s docket for No. 2011-CA-004209 NC is online at sarasotaclerk.com/CaseInfo.aspx. We
take judicial notice of the docket entries in this mortgage foreclosure case and of the documents
the entries identify in this footnote and in succeeding footnotes.
3
Order Setting Case for Residential Mortgage Foreclosure Non-Jury Trial, 2011-CA-
004209 NC.
4
Nor did an attorney appear who purported to represent Debtors. Debtors had fired their
attorney, Michael J. Owen, on August 19, 2013, less than two months prior to the October 14
trial date. Mr. Owen was the sixth attorney to represent Debtors in the case. He noted his
appearance as their counsel on May 13, 2013. On August 20, the day after he was discharged, he
moved the Court for leave to withdraw. The Court granted his motion on August 29, 2013.
Copies of his motion and the Court’s order were mailed to Debtors at the address of their
residence.
5
Court Appearance Record, 2011-CA-004209 NC. BSLF’s verified amended complaint
and Debtors’ amended answer framed the issues to be tried. The amended complaint contained
six counts. Count I sought a judgment of foreclosure; Count II a judgment for the amount due on
the note, interest and attorney’s fees; Counts III–V the recovery of fraudulent transfers; and
Count VI the imposition of a constructive trust. See Verified Amended Complaint, 2011-CA-
004209 NC. Debtors’ amended answer denied that the mortgage loan was in default, asserted
eleven affirmative defenses, and contained a six-count counterclaim. When they filed their
Chapter 7 petition, Debtors listed “Count VI-Civil RICO” as a personal property asset in the
4
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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
11 U.S.C. § 362(a), the filing of the petition operated automatically to stay the
public auction scheduled for November 18. Debtors disclosed their assets, income
appended Schedule B. See infra note 8 and accompanying text. Count VI-Civil RICO, brought
under the “Civil Remedies for Criminal Practices Act,” alleged that BSLF and Creditor
conspired to acquire an interest in the Property through a pattern of criminal activity or through
the collection of an unlawful debt.
6
This amount included the defaulted quarterly interest payments. The judgment fixed the
post-judgment interest rate at 4.75% per annum. The final judgment of foreclosure adjudicated
in Creditor’s favor all of the defenses and the six counterclaim counts asserted in Debtors’
amended answer.
7
Debtors’ newly engaged attorney, Arthur R. Rosenberg, noted his appearance in the
case and filed the motion. The motion sought relief from the judgment of foreclosure because
Debtors “lack[ed] knowledge of the pending trial date of October 14, 2013.” This was Mr.
Rosenberg’s only appearance as Debtors’ counsel in the foreclosure action. He was replaced by
Eric A. Lanigan on February 7, 2014. See infra note 19 and accompanying text.
8
On page 1 of the Chapter 7 petition, Debtors, responding to the question, “Nature of
Business,” stated: “Development & Water Supply.” In estimating respectively the number of
creditors, the value of their assets, and the value of their liabilities, Debtors checked boxes for
“1-49,” “$50,000,001 to $100 million,” and “$1,000,001 to $10 million.”
On November 8, 2013, a “suggestion of bankruptcy” notation was entered on the Circuit
Court’s docket for the mortgage foreclosure case.
5
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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 Schedule B - Personal Property listed the following assets and their
current values 10: “Gilberti Water Company & LandTech Design Engineering
Group - Florida,” $5.125 million; “Water and Mineral rights on property,” $50
million; and “Sarasota Case with RICO counterclaim . . . for predatory loan to steal
9
Schedule C. Article X of the Florida Constitution provides as follows in Section 4,
Homestead; exemptions:
(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. . . .
Fla. Const. art. X § 4(a)(1).
10
The Schedule B form requires the debtor to list the personal property by “Type of
Property.” The form lists 35 types or categories. For example, type 1 asks whether the debtor
has “Cash on hand,” 2, “Checking, savings or other financial accounts,” 9, “Interests in insurance
policies,” 10, “Annuities,” 12, “Interest in IRA, ERISA, Keogh, or other pension or profit
sharing plans,” 13, “Stock interests in incorporated and unincorporated businesses,” 15,
“Government and corporate bonds and other negotiable and non-negotiable instruments,” 16,
“Accounts receivable,” and 18, “[L]iquidated debts owed to debtor including tax refunds.”
Debtors checked “None” in responding to these types.
6
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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.
11
Schedule B also listed several personal items, such as a “Dodge SUV.” The “Sarasota
Case” referred to in the schedule was the mortgage foreclosure action in the Sarasota County
Circuit Court.
12
Debtors refer to the RICO claim in the mortgage foreclosure action. They asserted the
invalidity of the loan in the answer and counterclaim they filed in that action. See supra note 3.
13
The Gilberti Water Company’s claim was secured by a “Professional lien on entire 7
parcels,” which constituted the Property. Joseph Gilberti, the company’s owner, recorded the
liens with the Clerk of the Sarasota County Circuit Court on December 28, 2012. The liens were
inferior to the lis pendens BSLF had recorded on the Property prior to its commencement of the
mortgage foreclosure action.
14
No other creditor having an unsecured priority claim or an unsecured nonpriority claim
was identified.
7
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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 11 U.S.C. § 362(d).15 The Court granted the
motion on December 9, 2013.16 The next day, an attorney, David Lampley, filed a
notice of appearance as Debtors’ counsel.
The Trustee scheduled an 11 U.S.C. § 341 meeting of creditors for
December 12, 2013.17 Neither Debtors nor their attorney appeared, so the Trustee
rescheduled the meeting for January 8, 2014. Again, Debtors and their attorney
failed to appear, and the meeting was rescheduled for February 19, 2014.
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.
15
Debtors did not respond to Creditor’s motion, nor did the Trustee (since Creditor was
the only creditor Debtors had identified).
On December 11, 2013, the following notation was entered on the docket for the
mortgage foreclosure case: “Notice of filing – order granting motion for relief from automatic
stay.” A second docket entry noted the filing of Creditor’s “motion to reschedule foreclosure
sale.”
16
The Bankruptcy Court granted the motion pursuant to the Court’s Local Rule 2002-4.
The rule authorizes the granting of relief from an automatic stay if no party in interest objects.
17
11 U.S.C. § 341 provides that “[w]ithin a reasonable time after the order for relief in a
case under this title, the United States trustee shall convene and preside at a meeting of
creditors.”
18
On January 10, 2014, docket entries in the mortgage foreclosure case noted: “Order
denying Defendant’s amended [October 24, 2013] motion to set aside final judgment of
foreclosure and grant new trial”; “Order – rescheduling sale”; and “Judicial sale set for
8
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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.
3/11/2014 at 9:00 am in Online, Jdg: Judicial Sales.” Docket entries on January 17, 2014, noted:
“Notice of sale.” An entry on January 31, 2014 noted: “Proof of publication of sale.”
The lifting of the automatic stay enabled the Sarasota County Circuit Court to rule on
Debtors’ October 24 motion and to reschedule the public auction.
19
The docket in the mortgage foreclosure case contains these entries. February 7, 2014,
“Notice of appearance [by Eric A. Lanigan] – on behalf of Cecil Daughtrey, Jr; Patricia A.
Daughtrey”; “Notice of appeal”; “Forward notice of appeal to appellate court.” February 11,
2014, “Acknowledgment by appellate court of new appeal case 2D14-595”; “Order from district
court of appeals 2D14-595.” The 2DCA clerk’s docket is online at
onlinedocketsdca.flcourts.org. The appeal appears as Cecil Daughtrey, Jr. and Patricia A.
Daughtrey v. 72 Partners, LLC, Case No. 2D14-595, August 25, 2014. The 2DCA docket for
the appeal is available at http://www.onlinedocketsdca.flcourts.org. We take judicial notice of
the docket entries and of the documents the entries identified in this and succeeding footnotes.
9
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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 The Court also scheduled an evidentiary hearing for April 16 for the
purpose of determining the value of the Property and, thus, whether the bankruptcy
estate had any equity in the Property. On March 5, Mr. Lampley moved the Court
for leave to withdraw as Debtors’ counsel. 22
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, Article X, § 4(a)(1), limited their exemption to 160 acres. Debtors
did not respond to the objection, and the Court sustained it, limiting the homestead
exemption to 160 acres.
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
20
Joseph Gilberti was among those attending the March 3 hearing. He identified himself
as “the engineer of record for the Daughtrey ranch.”
21
A docket entry in the mortgage foreclosure case reflected the reinstatement with the
notation: “foreclosure sale canceled.” The reinstatement of the stay precluded Lanigan from
prosecuting, and the 2DCA from considering, Debtors’ appeal of the October 24, 2013
foreclosure judgment and January 10, 2014 order denying Debtors’ motion to set aside the
judgment and for a new trial. The 2DCA docket for the appeal does contain an entry showing
the reinstatement.
22
At the close of the March 3 hearing, Mr. Lampley informed the Court that Debtors’
schedules needed to be amended, and that he “was still trying to get all the information to amend
the schedules.” He requested “an additional ten days” to do that. He was apparently unable to
obtain the needed information from Debtors, so two days after the hearing adjourned he moved
the Court for leave to withdraw. As it turned out, Debtors’ schedules were never amended.
10
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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
23
Federal Rule of Bankruptcy Procedure 9019(a) provides that “[o]n motion by the
trustee and after notice and a hearing, the court may approve a compromise or settlement.” The
Trustee’s motion amended the same motion filed earlier in the day in order to omit “Debtors”
from the motion’s style.
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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 that Creditor’s $300,000 payment was “woefully inadequate in light of
the property’s true market value.” Three days later, the 2DCA served Mr. Lanigan
with an order requiring that “[Debtors’] initial brief shall be served within 20 days
or this appeal will be dismissed. Should [Debtors] move for an extension of time,
the motion must be accompanied by a status report on their obligation to pay for
record preparation.” 25
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
24
The Trustee would convey the 2,340 acres to Creditor “subject to any and all liens of
record, as well as any and all easements, restrictions and reservations of record, back taxes, if
any, and current and subsequent taxes.” The liens of record would include liens The Gilberti
Water Company had filed to secure claims, which as of November 7, 2013, totaled $10,250,000.
See supra note 13.
25
Mr. Lanigan apparently had not informed the 2DCA that the Bankruptcy Court had
reinstated the automatic stay, such that the appeal could not go forward.
12
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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
26
Joseph Gilberti attended the July 24 hearing. He informed the Court that he owned a
portion of the Property. The Court noted that he acquired his portion of the Property after the
foreclosure action and an accompanying lis pendens had been filed. Gilberti’s lawyer, Richard
A. Johnston, interjected to say that Gilberti recorded a deed to his portion of the Property prior to
the entry of the foreclosure judgment. The Trustee’s lawyer noted in response that Gilberti had
not “even file[d] a proof of claim.”
13
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an “Amended Motion and Notice of Proposed Compromise” (the
“Compromise”). 27
The August 28 hearing began with the Trustee’s attorney presenting the
Compromise. The Court then asked Mr. Lanigan whether Debtors objected to the
Compromise. 28 He said they did and announced that “we’ve had some recent
developments.” “I’m looking to confirm absolutely today that we have a
significant investor who . . . is entering into a contract today with Mr. Daughtrey
. . . which would ultimately be able to take out the creditor, 72 Partners, in its
27
As part of the Compromise, the Trustee, who by operation of law stood in the place of
Debtors in the mortgage foreclosure case, abandoned any arguments Debtors may have had for
the reversal of the judgment of foreclosure or the January 10 order denying their motion to set
aside the judgment and for a new trial. To that end, the Compromise provided the following:
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.
The initial motion to which the Compromise was attached 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.
In addition, the first supplemented motion for compromise stated:
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.
28
Mr. Lanigan and the attorney representing Mr. Gilberti appeared at the hearing via a
prearranged conference call.
14
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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
29
Mr. Lanigan had “gotten preliminary indication from [the Trustee’s attorney] as to
what [the Trustee’s expenses and the legal fees] may be.”
15
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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.
16
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(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
30
As indicated infra, at the September 25 hearing Creditor’s attorney informed the Court
that he and the Trustee’s lawyer had contacted Mr. Lanigan about the contract with the
“investor” he described at the August 28 hearing, but they “heard nothing” from him in response.
31
Flint Family Farms, LLC was a Florida limited liability company formed January 21,
2011 to pursue “any and all lawful business.” Robert Jerome Flint, Jr. was the only initial
member and is listed as the Manager-Member for every year of the LLC’s existence. He signed
the October 14, 2014 Agreement with Debtors. Flint Family Farms, LLC was administratively
dissolved for failure to file an annual report on September 23, 2016, and remains inactive.
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.
32
The companies’ obligation to go forward with the purchase was “contingent on
financing acceptable to purchaser” and Debtors’ production of an insurable title to the property
“subject only to easements, zoning and restrictions of record and free and clear of all other
17
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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’
attorney 33 and pursuant to 11 U.S.C. § 706(a) filed a “Motion to Convert to a Case
Under Chapter 11” (the “Motion to Convert”). The motion stated that “the Debtors
now realize that they filed under the wrong chapter, and due to the Debt limits
imposed under Chapter 13, the Debtors [sic] only option [is] for reorganization.”
The motion was perfunctory. It contained no reference to the contract Mr. Lanigan
expected Mr. Daughtrey to enter into with a “significant investor” on August 28.
Nor did it refer to any proposal that might constitute a feasible plan of
encumbrances except as stated in this offer.” The contract provided that “Purchaser shall be
given possession . . . on October 17, 2014.” The transaction would close thirty days after
“Purchaser’s receipt of an abstract showing marketable title in Seller or title insurance binder
showing insurable title in Seller.”
33
At the September 25 hearing, the Court noted on the record that Mr. DeCailly had “sat
in” on the August 28 hearing as an observer.
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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
34
The Motion to Convert referred to “unsecured creditors.” Debtors’ initial Schedule F
listed no unsecured creditors and an amended Schedule F had not been filed.
35
Mr. Tapp replaced Richard A. Johnston as Mr. Gilberti’s attorney. The motion he filed
was on behalf of Mr. Gilberti and Land Tech Design Group, Inc.
36
When the hearing began, Mr. Lanigan was on the telephone listening in. He was there
on the phone because the Court had instructed him at the August 28 hearing to get with the
lawyers for the Trustee and Creditor to see what could be worked out. The Court had continued
the hearing to September 25 to enable him to do that. The Court implied that if they could not
come to terms, it would approve the Compromise. As it turned out, Mr. Lanigan and the lawyers
never got together, and the scheme Mr. Lanigan posited at the August 28 hearing passed by the
boards.
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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 reminded the Court that under the Supreme Court’s decision in Marrama v.
Citizens Bank, 549 U.S. 365, 127 S. Ct. 1105 (2007), a debtor does not have an
absolute right to convert a Chapter 7 case to one under Chapter 11. The right to
37
On October 23, the Court would hear The Dellutri Law Group’s motion to quash the
U.S. Trustee’s subpoena.
38
Later in the hearing, Mr. DeCailly again stated the parties did not know exactly what
was being sold: “Your Honor, I’ve spoken at length with the Debtor. I’ve also spoken at length
with the prospective buyer who is willing to pay. But again, we still don’t know exactly what
he’s paying for. It’s a large parcel of land. Nobody has an exact description. It’s being done by
the buyer.”
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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.
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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]
39
Mr. DeCailly never indicated the amount of acreage for which the buyer was “willing to
pay up $3 million”; nor did he identify the buyer, referring intermittently to the buyer as “he”
and “they.” Mr. Tapp was the one who cleared the air and indicated the number of acres
involved: “The deal with the $3 million we’re talking about, not the Trustee’s deal, doesn’t sell
the full 2500 acres. It sells 1400 acres.”
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 offer and
acceptance. But, Mr. DeCailly decided to withhold that information from the Court. Instead, he
referred to a buyer’s offer of “up to $3 million” for the purchase of an amount of acreage yet to
be determined. Disclosing the limited liability companies’ offer and Debtors’ acceptance would
have materially contradicted Mr. Lanigan’s representation to the Court on August 28—that he
22
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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
expected Debtors to enter into a contract that day which would provide funds sufficient to satisfy
Creditor’s judgment and the expenses incurred in administering the bankruptcy estate, funds far
in excess of $3,334,148. The buyer to which Mr. DeCailly referred was not the limited liability
companies. He was referring to a buyer who had recently come on the scene and with whom no
agreement had been reached. In fact, Debtors were “not right now in the position to sell.”
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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
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$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. . . .
40
The Trustee also waived any causes of action the bankruptcy estate had against
Creditor, and relinquished Debtors’ right to appeal the foreclosure judgment. See supra note 27.
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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]’ receipt of an
abstract showing marketable title in Sellers or title insurance binder showing
insurable title in Seller[s].” In any event, “Purchaser[s] shall be given possession
of the property on October 17, 2014.” Debtors accepted the offer on September 1,
2014. It is obvious that the Agreement to Purchase Real Estate was the document
41
Mr. DeCailly was saying that Debtors instructed Mr. Lanigan to offer Creditor
$3,334,000 in full satisfaction of Creditor’s judgment of $4,267,436 (plus interest). Apparently,
the payment would be funded by the sale of 1,400 acres to the “buyer” Mr. DeCailly referred to
at the September 25 hearing. Creditor presumably would release its judgment lien on the
remaining 1,100 acres of the Property, which Debtors would retain. Mr. Lanigan did not tender
this offer to Creditor’s counsel.
42
Debtors’ 160-acre homestead was outside the 1,449.63 acres.
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Debtors forwarded to Mr. Lanigan on September 15, 2014, and what Mr. DeCailly
was referring to at the September 25 hearing when he said that he had spoken to a
buyer “who is willing to pay up to $3 million for [1,400 acres of] the property.”
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
43
Mr. DeCailly’s motion for reconsideration did not explain why the Court should
reconsider its October 3 denial of Debtors’ September 22 Motion to Convert based on the
September 1 Agreement, the existence of which he had withheld from the Court at the September
25 hearing, and the October 14 Agreement. Neither constituted newly discovered evidence that
might support a motion for reconsideration.
44
Mr. Gilberti filed the motion on behalf of himself and LandTech Design Group, Inc.
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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.
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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 they want to see it stay with the neighbor who’s
been there generation after generation so it can be used for what it’s
used for, farming.
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
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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.
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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
LLCs 45 became the Plan, Debtors would incur a capital gains tax in an amount the
sale proceeds could not cover. The Chapter 11 proceeding would fail and the case
would be converted to Chapter 7. At that point, Creditor would obtain relief from
the automatic stay, the public auction would go forward, and the Property,
including the 160 acres Debtors hoped to retain as a homestead, would be sold.
The approval of the Compromise eliminated the problems conversion to Chapter
11 would create. Further, it placed Debtors in a better position than they would
have occupied had their agreement with the LLCs gone forward.
Debtors disagree with the District Court’s analysis and therefore appeal its
judgment.
45
The October 14, 2014 Agreement was a “proposed” agreement because Debtors’
interest in the Property was part of the Chapter 7 estate and thus in the Trustee’s exclusive
control. Similarly proposed for the same reason was Debtors’ September 1, 2014 acceptance of
the LLCs’ offer to purchase part of the Property.
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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
46
But we also note that, in its initial appeal to the District Court, the Trustee put it thusly:
“This Court reviews the bankruptcy court’s legal conclusions de novo and its factual findings for
clear error. Both standards apply to review of the Conversion Denial Order.” (Emphasis
added).
32
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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 The
essential point is that whether to convert a Chapter 7 case to one under Chapter 11
is within the “sound discretion of the court” and depends upon whether conversion
would “inure to the benefit of all parties in interest.” In re Gordon, 465 B.R. 683,
692 (Bankr. N.D. Ga. 2012) (internal quotation marks omitted) (quoting S. Rep.
47
The District Court reasoned that “[w]here a matter is committed to the discretion of the
bankruptcy court, the district court must affirm unless it finds that the bankruptcy court abused
its discretion.” Thus, because “[t]he decision whether to convert is left in the sound discretion of
the court, based on what will most inure to the benefit of all parties in interest,” In re Gordon,
465 B.R. 683, 692 (Bankr. N.D. Ga. 2012) (internal quotation marks omitted) (quoting S. Rep.
No. 95–989, at 940 (1978)), abuse of discretion is the appropriate standard of review for a
Bankruptcy court’s denial of a motion to convert.
48
See, e.g., In re Jacobsen, 609 F.3d 647, 652 (5th Cir. 2010) (“The decision to convert a
Chapter 13 case to Chapter 7 under § 1307(c) [‘for cause’] is reviewed for abuse of discretion.”);
In re Rosson, 545 F.3d 764, 771 (9th Cir. 2008) (“We review for abuse of discretion the
bankruptcy court’s ultimate decisions to deny a request for dismissal of a Chapter 13 case under
§ 1307(b) and to convert a case from Chapter 13 to Chapter 7.”); In re Myers, 491 F.3d 120, 125
(3d Cir. 2007) (“We review the Bankruptcy Court’s decision to dismiss the bankruptcy case as a
bad faith filing for abuse of discretion.”); In re Consolidated Pioneer Mortg., 264 F.3d 803, 806–
07 (9th Cir. 2001) (“The decision to convert the case to Chapter 7 is within the bankruptcy
court’s discretion. Such a decision ‘will be reversed only if based on an erroneous conclusion
of law or when the record contains no evidence on which [the bankruptcy court] rationally could
have based that decision.’”); Matter of McDonald, 118 F.3d 568, 570 (7th Cir. 1997) (reviewing
bankruptcy court’s dismissal of Chapter 13 case for failure to make timely payments under the
plan for abuse of discretion); In re Schlehuber, 489 B.R. 570, 573 (B.A.P. 8th Cir. 2013), aff’d,
558 F. App’x 715 (8th Cir. 2014) (“We review the conversion of a Chapter 7 case to Chapter 11
under Bankruptcy Code § 706(b) for an abuse of discretion.”).
Indeed, our review of precedent yielded only one seemingly contrary authority. The
Court in In re John Franklin Copper reviewed the denial of conversion from Chapter 7 to
Chapter 13 de novo. 314 B.R. 628, 630 (B.A.P. 6th Cir. 2004). But a closer look reveals that the
Sixth Circuit took care to note that the facts there presented “an issue of statutory construction”
that had to be reviewed de novo. In re John Franklin Cooper, 426 F.3d 810, 812–13 (6th Cir.
2005).
33
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No. 95–989, at 940 (1978)). And where a matter is committed to the discretion of
the bankruptcy court, the reviewing court must affirm unless it finds that the
bankruptcy court abused its discretion. Amlong & Amlong, P.A. v. Denny's, Inc.,
500 F.3d 1230, 1238 (11th Cir. 2006).
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
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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 11 U.S.C. § 706(a) to
convert their Chapter 7 case to Chapter 11. Anticipating the Trustee’s argument
that their Motion to Convert was properly denied because they had filed it in “bad
faith,” Debtors submit that the Trustee failed to make a “prima facie showing of
bad faith.” “The Court did not deny [their Motion to Convert] because they
committed fraud, or waste, or concealed anything. The Court denied the motion
because the case was 11 months old.”49 Absent the Trustee’s prima facie showing
of bad faith, they argue that the Court, in a proper exercise of discretion, should
have granted their Motion to Convert.
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 § 706(a) to convert a Chapter 7 case to
Chapter 11. He points out that the right is limited by subsection (d), which
49
The District Court rejected Debtors’ argument that the Bankruptcy Court denied
conversion “because the case was ‘too old to convert.’” We agree with the District Court. There
is nothing in the record to support the argument that the Bankruptcy Court denied conversion
because the case was eleven months old. The Court referred to the age of the case on several
occasions, but did so only to stress that the case, which should never have been filed under
Chapter 7 in the first place, needed to be resolved. Mr. DeCailly admits as much. Debtors,
acting on “bad legal advice,” should have brought their case under Chapter 11, not Chapter 7.
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provides that “a case may not be converted” from Chapter 7 to Chapter 11 “unless
the debtor may be a debtor” under Chapter 11. See 11 U.S.C. § 706(d). Debtors
could not qualify as Chapter 11 debtors, he contends, because they had “no likely
prospect of reorganization,” see 11 U.S.C. § 1112(b)(4)(A), and conversion to
Chapter 11 was therefore precluded under Marrama.
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.” 11 U.S.C. § 706(a). This right is limited
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by subsection (d), which provides that “a case may not be converted” from Chapter
7 to Chapter 11 “unless the debtor may be a debtor” under Chapter 11. Id.§ 706(d). In other words, a debtor’s right to convert is “expressly conditioned” on
his ability to qualify as a debtor under the Chapter to which he seeks to convert.
Marrama, 549 U.S. at 372, 127 S. Ct. at 1110.50
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.” 11
U.S.C. § 1112(b)(1) (emphasis added). A non-exhaustive list of “causes” includes,
among other things, “substantial or continuing loss to or diminution of the estate
and the absence of a reasonable likelihood of rehabilitation,” a debtor’s “gross
mismanagement of the estate,” or a debtor’s “inability to effectuate substantial
consummation of a confirmed plan.” Id. § 1112(b)(4)(A), (M), (B).
To rule that one’s Chapter 11 case “should be dismissed or converted to
Chapter 7 . . . is tantamount to a ruling that the individual does not qualify as a
debtor under” Chapter 11. See Marrama, 549 U.S. at 365, 373–74, 127 S. Ct. at
50
In Marrama, the Supreme Court held that a court may deny a debtor’s request to
convert a case from Chapter 7 to Chapter 13 where “cause” exists under 11 U.S.C. § 1307(c) to
dismiss the case or convert it back to Chapter 7. 549 U.S. at 373, 127 S. Ct. at 1110–11.
Chapter 11 contains a provision nearly identical to § 1307(c), except that while Chapter 13
provides that a “court may” convert or dismiss a case “for cause,” Chapter 11 mandates that “the
court shall” convert or dismiss such a case. 11 U.S.C. §§ 1123(b)(1), 1307(c) (emphasis added).
The Supreme Court’s reasoning thus applies with even more force here. Moreover, the Court
couched its ruling in language and logic consonantly suitable to conversions to Chapter 11.
Therefore, Marrama’s holding applies equally to conversions from Chapter 7 to Chapter 11.
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1110–11. Thus, § 706(d) “provides adequate authority” to deny a motion to
convert to Chapter 11 when “cause” exists under § 1112(b)(4). Id. at 374, 127 S.
Ct. at 1111. If, as Debtors argue, conversion to Chapter 11 must occur before
§ 1112(b)(1) comes into play, it means that the bankruptcy court must go through
the formality of granting conversion and then, in the next breath, dismiss the case
or convert it to a Chapter 7. This would place form over substance and defy
common sense. 51
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.” 11 U.S.C. § 1112(b)(4)(A).
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 § 1112(b)(4) causes for denying conversion to Chapter
11 were present as well: “failure to comply with an order of the court,” “failure
51
Moreover, in adopting Debtors’ position, we would “fail[] to give full effect to the
express limitation in” § 706(d). See Marrama, 549 U.S. at 372, 127 S. Ct. at 1110; Corley v.
United States, 556 U.S. 303, 314, 129 S. Ct. 1558, 1566 (2009) (noting that it is “one of the most
basic” canons of statutory interpretation that “a statute should be construed so that effect is given
to all its provisions”) (internal quotation marks and citations omitted); Marx v. Gen. Revenue
Corp., 568 U.S. 371, 386, 133 S. Ct. 1166, 1178 (2013) (“[T]he canon against surplusage is
strongest when an interpretation would render superfluous another part of the same statutory
scheme.”).
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timely to provide information or attend meetings reasonably requested by the
United States trustee,” and “inability to effectuate substantial consummation of a
confirmed plan.” Id. § 1112(b)(4)(E),(H), (M). Also present was a cause not listed
in the statute, the lack of good faith. “[A] debtor’s lack of ‘good faith’ may
constitute cause for dismissal of a petition.” In re Nat. Land Corp., 825 F.2d 296,
297 (11th Cir. 1987) (internal quotation marks omitted). In sum, a bankruptcy
court does not abuse its discretion in denying conversion from Chapter 7 to
Chapter 11 where “cause” exists that would require the Court to dismiss or
reconvert the Chapter 11 case anyway. Multiple bases for “cause” exist here.
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
52
Any tax “incurred by the estate” is categorized as an administrative expense under 11
U.S.C. § 503(b)(1)(B)(i), entitled to second priority under 11 U.S.C. § 507(a)(2). See Richard
Levin & Henry J. Sommer, 4 Collier on Bankrputcy ¶ 503.07 (16th ed. 2018) (“[F]or a tax claim
to be entitled to administrative expense priority, a court must determine that (1) the tax was
‘incurred’ by the estate; and (2) the tax claim is not a claim which must be treated as a
prepetition priority claim under § 507(a)(8).”). Administrative expenses have priority over all
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On June 11, the Court scheduled a hearing for July 24 on the Trustee’s
Motion and Notice of Compromise. On June 23, Mr. Lanigan appeared as
Debtors’ attorney and filed an objection to the proposed Compromise. By July 24,
however, they were having second thoughts. As Mr. Lanigan expressed it at the
hearing, if the boundaries of the 160-acre homestead tract were redrawn to include
the well, there would be an “extremely high likelihood that the whole thing goes
away.” It is easy to understand why Debtors had a change of mind. The chances
of the 2DCA vacating the foreclosure judgment were nonexistent, meaning that
Creditor’s lien was valid and covered all 2,500 acres of the Property. And there
were no investors on the horizon ready to step in with a solution better than the one
the Compromise provided. The Court told Mr. Lanigan that his clients “really
ha[d] to look long and hard at this deal.” It continued the hearing to August 28 to
give Debtors space to take that hard look and the Trustee and Creditor time to
redraw the boundaries of the 160-acre tract to accommodate the well.
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
other expenses and claims except for domestic support obligations, which are not at issue here.
See 11 U.S.C. § 507(a)(1)–(2).
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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 Chapter 7 case would have to be
converted to one under Chapter 11. As for now, going along with the Compromise
proposal was out of the question. Debtors would resist its approval at every turn.
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
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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 Chapter 11, arguing that the conversion would be yet another “stalling
tactic and a delay mechanism.” The Trustee echoed his sentiments. Debtors had
been stalling from the start, he said. They “failed to appear for three” of the first
four § 341 meetings of creditors and refused to file “amended schedules B, E and
F” despite repeated requests for amendments.
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.
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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
Chapter 11. The motion asserted nothing more than this: Debtors have an
“absolute right” to convert their case, and conversion can “bring more value to the
estate and pay a dividend to unsecured creditors.”
Debtors were financially incapable of prosecuting a plan to confirmation and
eventual consummation. According to their Chapter 7 petition and asset schedules,
they had no cash on hand, no checking or savings accounts, nothing evidencing
liquidity. Their income amounted to only $2,200 per month, derived for the most
part from the sale of sod. For a plan to succeed, the liens Mr. Gilberti had recorded
to secure claims amounting to $10,250,000 would have to be removed. 53 To
remove them, adversarial proceedings would be necessary. Who would finance all
of that? For Debtors to go forward under Chapter 11, someone would have to step
in and provide the wherewithal. That Debtors lacked an investor willing to provide
funds sufficient to underwrite the expense of removing Mr. Gilberti’s liens, satisfy
Creditor’s judgment, cover the Trustee’s expenses and legal fees, and pay the
53
At the November 5, 2014 hearing on Debtors’ motion for reconsideration, Creditor’s
attorney informed the Court that over the previous eighteen to twenty-four months, Mr. Gilberti
had recorded liens against the property to secure claims of $70 million. Debtors’ Schedule D
listed a Gilberti Water Company claim of $10,250,000. See supra note 13 and accompanying
text.
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capital gains tax that would be assessed became crystal clear at the September 25
hearing.
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 Chapter 11. They had a buyer “willing to pay up to
$3 million” for some of the land. He qualified his remark by saying, “I don’t quite
yet know what we’re selling.” If he was referring to the September 1 Agreement,
he knew exactly what Debtors were selling because an attachment to the
Agreement described it with specificity.
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 $3 million.”
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The Trustee’s lawyer told the Court that Debtors were not proceeding in
good faith and that if converted to Chapter 11, the case would wind up back in
Chapter 7 due to Debtors’ inability to present a feasible plan of reorganization.
Creditor’s lawyer went a step further, arguing that Debtors were abusing the
bankruptcy process.
The Court found no merit in Debtors’ motion. Debtors had no plan, “no
purchase contract,” no “offer . . . on the table today.” Marrama controlled. Mr.
DeCailly’s presentation firmly established that his clients were not eligible to be
Chapter 11 debtors.
D.
The evidence of “cause” for rejecting Debtors’ Motion to Convert is
overwhelming. The motion was a sham, farcical on its face, and was filed for the
sole purpose of thwarting Creditor’s effort to obtain satisfaction of its judgment.
Debtors had no plan and none on the horizon. Mr. DeCailly chose not to proffer
the September 1 Agreement as a plan because it was patently unenforceable; it was
illusory. The “earnest money” the LLCs deposited was “$ 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.
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In fact, Debtors’ prospects for producing a plan that could be confirmed
were nil. Cause for denying the Motion to Convert therefore existed under
§ 1112(b)(4)(M). Cause existed under (b)(4)(E) and (H) as well. Debtors, either
personally or through counsel, failed to comply with Court orders and, despite
repeated requests from the Trustee, refused to amend their schedules. Finally,
Debtors filed their Motion to Convert in bad faith, which constitutes cause.54
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 Chapter 11, “we get a new proof of claim period. All the
periods start over again . . . then we’ll know everybody involved and we will have
an opportunity to propose this sale and get the lienholder together with the buyer.”
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
54
The Bankruptcy Court did not rely on bad faith as a cause for denying the motion. For
that reason, the District Court did not consider it. We exercise our authority to affirm a district
court decision on a ground the court did not rely on, see Waldman v. Conway, 871 F.3d 1283,
1289 (11th Cir. 2017) (per curiam), and do so additionally on the ground of bad faith.
55
11 U.S.C. § 105(a) provides that:
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Marrama, 549 U.S. at 375, 127 S. Ct. at 1112 (concluding that the authority
granted to bankruptcy judges under § 105(a) to take any action necessary to
prevent an abuse of process “is surely adequate to authorize an immediate denial of
a motion to convert filed under § 706”).
In addition to Debtors’ bad faith, other § 1112(b)(4) causes required the
denial of conversion to Chapter 11. Debtors failed to demonstrate a reasonable
likelihood of success under Chapter 11. And they deliberately refused to amend
their schedules as instructed repeatedly by the Court. They knew all along of the
importance of amending their schedules. The unsecured creditors had not been
identified. The case could not go forward without disclosing their identities.
IV.
Federal Rule of Bankruptcy Procedure 9023 provided the procedural basis
for Debtors’ motion for reconsideration. The rule states that Federal Rule of Civil
Procedure 59 “applies in cases under the Code. A motion . . . to alter or amend a
judgment shall be filed, and a court may on its own order a new trial, no later than
(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.
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14 days after entry of judgment.”56 On October 17, 2014, Debtors moved the
Bankruptcy Court for reconsideration of its order of October 3 denying their
Motion to Convert. Although the motion did not cite Rule 9023 or Rule 59, it is
apparent that it was brought under Rule 59(e), “Motion to Alter or Amend a
Judgment.”
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. Rule
59(e) motions are “aimed at reconsideration, not initial consideration.” FDIC v.
World Univ. Inc., 978 F.2d 10, 16 (1st Cir. 1992) (internal quotation marks
omitted). The September 1 Agreement was not “newly discovered evidence.” Mr.
DeCailly had it in his possession prior to the September 25 hearing, but chose not
56
Rule 59 does not apply where a party in interest moves “for reconsideration of an order
allowing or disallowing a claim against the estate.” See Fed. R. Bankr. P. 3008.
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to disclose it. The September 1 Agreement was worthless. What Debtors wanted
the Court to consider was the October 14 Agreement. The Court could have
denied the motion for reconsideration on the ground that it was not a motion for
reconsideration at all. It was a new motion to convert the case to Chapter 11. 57
But instead of denying the motion, the Court set it for a hearing on November 5.
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 not complied with the Court’s order that he obtain Debtors’ amendments to
their schedules.59 Nor had he determined Debtors’ tax basis in the Property. The
57
The filing of the motion constituted an abuse of the bankruptcy process and for that
reason could have been stricken pursuant to 11 U.S.C. § 105(a).
58
Under no circumstances could the sale of the Property be closed within fifteen days.
The October 14 Agreement’s closing provision is contained in the “Addendum to Vacant Land
Contract.” The provision states the following:
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.
59
He admitted that twenty-seven unsecured creditors needed to be listed.
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Trustee’s attorney pointed out that $4,621,000 would not cover Creditor’s secured
claim, the expenses associated with administering the estate, and the capital gains
tax that would be imposed. In addition to this, Debtors would have to finance the
litigation Mr. DeCailly acknowledged would be necessary to remove Mr. Gilberti’s
now $70 million worth of liens on the Property. Debtors lacked the ability to
finance that litigation or underwrite the expenditures that would be incurred in
bringing their proposed plan to fruition. Implicit in Mr. DeCailly’s response to
this, therefore, was that a third party, the LLCs or their financier, would provide
the necessary funds.
The Court’s response was that if conversion was granted, the plan Mr.
DeCailly outlined would fail, Debtors would be back in Chapter 7, the Property
would be foreclosed upon, and Debtors would be left with nothing: “They
wouldn’t have . . . their homestead [or] their well.” The Court therefore denied
Debtors’ motion for reconsideration.
Assuming the Court was treating the motion for reconsideration as a new
effort to convert the case to a Chapter 11, there were ample reasons to deny it. All
of the causes that warranted the denial of the Motion to Convert were present.
Thus, the District Court properly affirmed the Bankruptcy Court’s orders of
October 3 and November 18.
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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
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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
60
The Trustee’s quitclaim deed would convey to Creditor the estate’s interest in the
2,340 acres, but the land would be subject to The Gilberti Water Company liens, which at latest
count secured claims of $70 million, see supra notes 13 and 24. In exchange, Creditor would
pay the Trustee $300,000 for distribution to general unsecured creditors, including Creditor.
61
As Mr. DeCailly informed the Court at the November 5, 2014 hearing, Debtors wanted
the Property (less 160 acres) to go to the LLCs, who were willing to pay $4,621,000 for it—that
if the Property “cannot stay . . . in their family, then they want to see it stay with the neighbor
who’s been there generation after generation.”
52
Case: 15-14544 Date Filed: 07/24/2018 Page: 53 of 53
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.
62
As the Compromise provided, Creditor’s judgment lien would be lifted with respect to
the 160 acres set aside for Debtors’ homestead. Thus, the public foreclosure sale would involve
only 2,340 acres of the property.
53