Opinion
Case Nos. 02-63377-O2-63384, Adversary Proceeding No. 02-06146
July 23, 2002
MEMORANDUM OPINION
An expedited hearing was held July 9, 2002, on plaintiff-debtors' motion for preliminary injunction. Debtors' expedited motion, filed along with a complaint for injunctive relief on July 2, 2002, seeks to enjoin defendant Pleasants Investments IV Limited Partnership from pursuing confessions of judgment against Frank P. Ellis IV in the Circuit Court of Frederick County, Maryland. At the conclusion of hearing, the court reserved ruling and requested the parties to submit proposed orders for entry, which have been received.
On July 15, 2002, the court entered an order denying debtors' motion. This opinion supplements the court's order. This opinion also incorporates the court's opinion entered on July 16, 2002, concerning the denial of Pleasants LP's motion to dismiss these bankruptcy cases or alternatively to transfer the cases to the District of Maryland.
Findings of Fact.
These jointly administered chapter 11 cases were filed on April 18, 2002. The debtors are Land Stewards, L.C., and seven other entities who own a large planned unit development real estate project in Frederick County, Maryland, known as Eaglehead at Lake Linganore. Prior to April 17, 2002, ownership of the debtors, other than Land Stewards, was controlled by Frank P. Ellis IV. In connection with the Eaglehead development, Ellis and the other entities had incurred substantial indebtedness in the form of promissory notes secured by mortgages on Eaglehead realty.
On April 17, 2002, Ellis sold his personal real estate interest in Eaglehead and his control of the seven affiliated debtor entities that owned or controlled assets in Eaglehead to debtor Land Stewards, a new Virginia limited liability company created just prior to the transaction for the purpose of acquiring Eaglehead.
Land Stewards paid approximately $300,000.00 in cash to acquire Eaglehead and assumed Ellis' and the affiliated debtors' obligations for indebtedness that totaled in excess of $15,000,000.00.
It is Ellis' liability on some of the promissory notes assumed by Land Stewards that is at the core of the instant adversary proceeding. These particular notes are held by defendant Pleasants LP, an investment entity owned, in part, and controlled by William D. Pleasants Jr. Prior to the sale by Ellis to Land Stewards, Ellis and Mr. Pleasants had been parties to an agreement dated March 13, 2001, to jointly develop the property owned by Ellis and the affiliated debtors at Eaglehead.
On or about August 20, 2001, Pleasants exercised his right under a feasibility and title contingency provision of the development agreement to terminate the agreement with Ellis. Subsequent efforts by Ellis and Pleasants to arrive at a mutually acceptable alternative method of going forward on a joint development of Eaglehead also were unsuccessful.
During the period of time that Pleasants was performing his feasability and title study of Eaglehead, Pleasants caused Pleasants LP to purchase a series of notes secured by deeds of trust on Eaglehead. The notes had been given by Ellis to financial institutions for loans to him and were secured by property owned by Ellis or by the affiliate debtors. An amendment to the development agreement reflects that the balance due on these promissory notes on July 23, 2001, was $8,850,915.00.
Subsequent to purchasing the loans, Pleasants LP made additional advances to Ellis, both before and after the agreement was terminated in August 2001. Under the agreement, Ellis was entitled to six months of no interest payments under the loans acquired by Pleasants LP and to two additional months of interest only payments before the loans matured. As a result, the maturity date of the loans was April 19, 2002. Two days prior to the maturity of the notes, Ellis closed his sale transaction with Land Stewards. These bankruptcy cases were filed the next day.
In May 2002, Pleasants LP filed against Ellis six separate confessions of judgment actions with respect to Ellis' notes purchased by Pleasants LP. The actions were filed in the Circuit Court of Frederick County, Maryland, where Eaglehead is located and where Ellis is also a resident. Ellis was served with notices of the entry of confessions of judgment on June 16, 2002. Pursuant to the notices, Ellis had 30 days from the date of service in which to move the Maryland court to open or vacate the judgments by confession. As stated previously, the notes are secured by various mortgages on portions of the Eaglehead project now owned and controlled by Land Stewards and the affiliated debtors.
As a part of the April 17, 2002, closing, Land Stewards and the other debtors retained Ellis as a consultant pursuant to a written consulting agreement.
Debtors' Complaint and Motion For Injunctive Relief.
On July 2, 2002, debtors filed a complaint for injunctive relief along with a motion for preliminary injunction and motion for expedited hearing. The complaint recites the facts surrounding Mr. Pleasants' and Pleasants LP's efforts to confess judgment against Ellis and to collect and enforce their remedies under Ellis' notes in the Maryland circuit court. The complaint alleges that Ellis has been an integral part of debtors' reorganization efforts and that Pleasants, by proceeding against Ellis to collect the notes, is attempting to hinder the reorganization. The complaint seeks an order under § 105 of the Bankruptcy Code extending the automatic stay of § 362(a) to protect Ellis for a period of 120 days from the deadline to move to open or vacate the confessed judgments.
Debtors' motions for preliminary injunction and for expedited hearing seek to have the court consider the allegations of the complaint and issue a preliminary injunction on an expedited basis that enjoins Pleasants LP from proceeding on the confessions of judgment for a period of 120 days.
Position of Parties.
DEBTORS
Debtors consider Ellis to be an integral part of their reorganization efforts. This is primarily because of his institutional knowledge of Eaglehead and his relationship with persons and entities who are necessarily involved in the future continued development of Eaglehead. Debtors therefore believe that Ellis must be allowed to expend his full time and energy in furtherance of the debtors' reorganization efforts and accordingly that he should not be required to defend Pleasants LP's collection efforts. Moreover, these efforts are actually directed toward preventing debtors' successful reorganization.
Because debtors will ultimately be liable for Ellis' debt to Pleasants LP, they also contend that the amount of this debt should be adjudicated by this court rather than the Maryland circuit court.
Debtors rely on the standard for preliminary injunction prescribed by the Fourth Circuit in Blackwelder Furniture Co. v. Seilig Mfg. Co., 550 F.2d 189, 194-95 (4th Cir. 1977).
PLEASANTS LP
Pleasants LP contends that Ellis is not a source of funds for the funding of any plan of reorganization in this case, that the request to extend the automatic stay to protect Ellis, a non-debtor, is motivated by reason of the fact that debtors are obligated to protect and indemnify Ellis, and that Ellis is a substantial creditor of debtors secured by a deed of trust on Eaglehead and a pledge of Land Stewards' various equity ownership interests in the seven affiliated debtors. Pleasants LP also asserts that Ellis is capable of assisting his counsel in prosecuting any motion to open or vacate the confessions of judgment without preventing him from continuing to serve as a consultant in the chapter 11 cases and that Ellis' and debtors' conclusion that Ellis could not do both is unsupported by the evidence.
Pleasants LP further contends that the Blackwelder test is not met; there are no unusual circumstances in this case to extend the automatic stay to Ellis, and if Ellis wants the benefit of the automatic stay, he should file his own bankruptcy case.
Discussion and Conclusions of Law.
Debtors' complaint and motion requested this court to enjoin Pleasants LP from pursuing confessions of judgment against Frank Ellis, a non-debtor. Land Stewards' principal officer believes that Ellis is critically important to debtors' reorganization and that if Ellis is required to defend these collection actions his services to debtors will be substantially impaired. Debtors also argued that Pleasants LP's principal's real motivation is to prevent a reorganization favorable to all creditors.
The court has concluded in previously ordering denial of the preliminary injunction that even though Ellis may be important to the reorganization, the circumstances presented do not warrant an injunction.
Section 362(a) of the Bankruptcy Code provides only for the automatic stay of judicial proceedings and enforcement of judgments against the debtor or the property of the estate. Credit Alliance Corp. v. Williams, 851 F.2d 119, 121 (4th Cir. 1988); F.T.L., Inc. v. Crestar Bank (In re F.T.L., Inc.), 152 B.R. 61, 63 (Bankr.E.D.Va. 1993). This court has previously held that in the absence of compelling unusual circumstances, guarantors of a debtor's obligations must file their own bankruptcy petitions to receive the benefits of bankruptcy law. Crumpler v. Wetsel Seed Co. (In re Southside Lawn Garden), 115 B.R. 79, 81 (Bankr.E.D.Va. 1990).
The unusual circumstances that must exist to enable a court to enjoin a pending debt collection proceeding against a non-debtor third party pursuant to 11 U.S.C. § 105(a) were recognized by our court of appeals in A.H. Robins Co. v. Piccinin, 788 F.2d 994 (4th Cir. 1986), cert. denied, 429 U.S. 876 (1986). In A.H. Robins the court held that where the identity of the debtor and a third party are inexorably interwoven so that the debtor may be said to be the real party against whom the creditor is proceeding, a bankruptcy court may exercise equitable jurisdiction to enjoin proceedings against non-debtor third parties. As to whether unusual circumstances exist to stay proceedings against non-debtors, the need for such relief must be justified "by clear and convincing circumstances outweighing potential harm to the party against whom it is operative." Id. at 1003. For a recent decision on the issue raised in A.H. Robins, see Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d 648 (6th Cir. 2002), cert. denied, 123 S.Ct. 85 (2002).
There is no question that Pleasants LP, as holder of the notes, has the right to pursue collection remedies against Ellis, as maker of the notes. It is clear from the evidence that Ellis is not "inexorably interwoven" with debtors so that the action against Ellis can be said to really be an action against debtors, as in A.H. Robins. Debtors do not have personal liability under the notes in question. The affiliated debtors provided credit accommodations to Ellis by providing indemnity deeds of trust on their properties.
Debtors' witness Wilcox testified that Ellis' services to the debtors will be critical to the debtors' reorganization. Both Wilcox and Ellis stated that in their opinions if Ellis is required to defend the collection actions, he will be unable to fulfill his obligations to the debtors. However, the court finds that these opinions are not supported by the evidence. In fact, Ellis testified that he did not know what would be involved in defending against the state court actions.
The court sees no reason why Ellis cannot work with his counsel in presenting his defenses in support of a motion to open or vacate the confession of judgment actions in Maryland and at the same time, perform his valuable role in the debtors' reorganization efforts. Furthermore, Ellis has the ability to obtain the benefit of the automatic stay of § 362(a) by filing his own bankruptcy case.
Debtors have also argued that Pleasants LP's real motivation here is to inhibit the debtors' reorganization to the detriment of other creditors. While it does appear to the court from Mr. Pleasants' actions in these cases that he may be resistant to Land Stewards' reorganization efforts, he is proceeding under his contractual rights, and his motivation is not a relevant consideration in the motion before the court.
In their argument on the applicability of a preliminary injunction to the facts of this case, both parties rely on the controlling four-part test adopted by the court of appeals in Blackwelder Furniture Co. v. Seilig Mfg. Co., 550 F.2d 189, 194-95 (4th Cir. 1977). The elements of the test are:
(a) the likelihood of irreparable harm to plaintiff if an injunction is not granted;
(b) the likelihood of harm to defendant if an injunction is granted;
(c) the likelihood plaintiff will succeed on the merits; and
(d) the public interest.
Pleasants LP, arguing that debtors' evidence has failed to meet the Blackwelder standard, contends that it is of particular importance that Ellis is not a party to debtors' motion. Because Ellis is not a party, the court, should the injunction be granted, would be unable to protect Pleasants LP's interests with respect to the disposition of property or assets of Ellis during any period of time that the stay is in effect. Consequently, it is argued, the court cannot conclude that there exists no likelihood of harm to Pleasants LP if the preliminary injunction is granted.
Actually, the court could protect Pleasants LP from harm by requiring Ellis to agree to restrictions on his transfer of assets as a condition to any grant of injunction. The real weakness in debtors' Blackwelder position is that the evidence just does not establish that they will be irreparably harmed if the injunction is not granted.
The evidence does not establish that a denial of the injunction will prevent Ellis from fulfilling his duties assisting in the debtors' reorganization. Perhaps a stronger argument for the injunction is that the Maryland state court proceedings could fix the amounts Ellis owes to Pleasants LP and consequently the amounts that debtors owe Ellis. However, even this potential does not equate to irreparable harm. This court's prior ruling in the Southside Lawn Garden case demonstrates that a collection action against another party liable on the same indebtedness as debtor does not constitute the type of unusual circumstances contemplated by the Court of Appeals in A.H. Robins. 115 B.R. 79 (Bankr.E.D.Va. 1990). For the same reason, the court cannot find that the plaintiff-debtors would likely succeed on the merits.
In its proposed conclusions of law, Pleasants LP counters this argument by noting the difference between a debt and a claim in a bankruptcy case. Ellis' debt to Pleasants LP will be determined in the Maryland court. The claims in these cases are non-recourse claims limited to the property at Eaglehead that secure each note, and this court will have "full ability" to determine the amount of the claims against collateral of the bankruptcy estates. Pleasants LP, Proposed Findings of Fact and Conclusions of Law, pp. 8-9.
Finally, the public interest would not be served by granting a preliminary injunction as it would be contrary to the standards established in the Fourth Circuit in Credit Alliance Corp. v. Williams, 851 F.2d 119 (4th Cir. 1988) and the absence of unusual circumstances in this case as contemplated in A.H. Robins.
In summary, debtors have been unable to demonstrate the presence of "unusual circumstances" as required by the court of appeals in A.H. Robins, and they are unable to meet the standards of Blackwelder for a preliminary injunction. Accordingly, the motion for a preliminary injunction will be denied.
An order denying plaintiff debtors' motion for preliminary injunction was entered on July 15, 2002.