FINDINGS OF FACT, CONCLUSIONS OF LAW AD MEMORANDUM OPINION
JOHN K. OLSON, Bankruptcy Judge.
This case presents the tragic and unedifying spectacle of an ex-husband and ex-wife wasting huge portions of the equity in their only significant marital asset, a beachfront hotel, in a decade-long litigation grudge match which has enriched a few lawyers but brought no joy or satisfaction to any one. The ex-husband, an involuntary debtor, was characterized by the trustee's counsel as abusive; the ex-wife, as vindictive. Both characterizations hit the mark.
On August 22, 23, and 24, 2006, I held trial on the issues pending between the plaintiff, Sonya L. Salkin (the "Trustee"), as trustee for the ex-husband, Denis Chira ("Denis" or the "Debtor"), and three of original eight defendants, the ex-wife Elizabeth Chira
The Debtor's case began with the filing of an involuntary petition in April 2005.
The Trustee commenced this adversary proceeding in March 2006 to determine the validity, priority, and amount of those deeds made and obligations incurred by the Debtor. The Trustee also sought to obtain determinations of many collateral issues involving mortgagees, lienholders, co-owners, and an insider lessee, that affect the Trustee's ability to liquidate the estate. The eight defendants in this adversary proceeding are those who claim an interest in real property in Hollywood, Florida.
In a series of partial judgments entered in this case, the interests of five defendants have been resolved,
The remaining issues may be stated, somewhat simplistically, as: (1) What are Elizabeth's interests in the Property and her claims against Denis, and should any of those claims be subordinated because of inequitable conduct? (2) What are first mortgage holder Eliezer Botton's secured' claims against the estate, and should any of those claims be subordinated? (3) Should the lease held by Sheldon Hotel Lounge Corp. ("Lounge Corp."), be disregarded as a sham?
Findings of fact
Most of the facts, many of them developed through years of litigation in state court prior to the commencement of this case, are stipulated by the parties. Others are the subject of unrebutted testimony of either Denis Chira or Elizabeth Chira. Where the court has adopted one or another's party's version of disputed events, it does so based on observation of the demeanor of the witnesses and consideration of all conflicting evidence.
The Debtor, Denis Chira, was married to the defendant Elizabeth Chira from October 29, 1970 to 1999.
At one time, Denis and Elizabeth were joint owners of real property located in Hollywood, Florida and more particularly described as:
The property consists of a 40-room hotel with first-floor retail space ("the Sheldon Beach Hotel") on four oceanfront lots, and several parking lots which are contiguous to each other but not to the oceanfront lots (collectively, "the hotel" or "the Property").
Denis and Elizabeth acquired the Property by a warranty deed dated September 28, 1978 (recorded at Official Records Book 7794, page 998, Public Records of Broward County),
For many years, Denis and Elizabeth operated the Sheldon Beach Hotel, and at various times they operated a nightclub and other stores in the retail space facing the ocean on the first floor of the hotel.
At the time of his divorce from Elizabeth, Denis owned an undivided one-half interest in the Property
The defendant Eliezer Botton ("Eliezer") is Elizabeth's brother.
The defendant Sheldon Hotel Lounge Corp. ("Lounge Corp.") is a Florida corporation.
Through the years, Denis and Elizabeth (i) deposited the hotel rents and receipts, the Sheldon Beach Hotel's retail rents, and receipts from their nightclub, into Lounge Corp., (ii) paid the operating expenses of the Sheldon Beach Hotel and the nightclub from Lounge Corp., and (iii) drew from Lounge Corp. such compensation, advances, or capital distributions as Lounge Corp. could afford to pay them.
Around 1989, Denis and Elizabeth separated and Elizabeth received a ghet under Jewish law, but they were not divorced in civil court.
On September 23, 1993, the Chiras gave their promissory note in the amount of $550,000, and a first mortgage on the Property securing the note, to Family Bank.
On December 9, 1996, Denis and Elizabeth conveyed the Property from a tenancy by the entireties into a tenancy-in-common, each party owning an undivided fifty percent interest.
The Chiras separated in October 1998, and Elizabeth commenced a divorce proceeding in the circuit court in Broward County on February 2, 1999 (Case No. 99-1592(41/91)).
Both the 1993 Post — Nuptial Agreement and the May 14, 1999 Mediation Agreement were referred to and incorporated in the final judgment of divorce entered on June 17, 1999.
In June, 1999, Denis and Elizabeth entered into a Business Lease of the Property
Denis was married to Tiffany Chira from 1999 to 2003,
On June 2, 2000, Denis executed and delivered to City First Mortgage Corp. a promissory note in the amount of $425,300 and a Mortgage and Security Agreement on his 50% interest in the Property.
City First Mortgage Corp. assigned the instruments described in the preceding two paragraphs to First Trust and other assignees on or about December 12, 2000 (OR 31155/1708),
On September 22, 2000, Denis and Elizabeth reached another mediated agreement, approved by the divorce court on October 13, 2000.
On December 18, 2000, Transcapital Bank commenced a foreclosure action, Case No. 00-021423(25) (17th Judicial Circuit, Broward County), against the Property, and recorded a Notice of Lis Pendens (OR 31148/0051).
Ultimately, special master Jerrold Knee issued a Special Master's Report and Recommendations dated July 22, 2003, recommending a setoff in favor of Elizabeth in the amount of 5,377.58.
On or around July 22, 2001, Denis entered the Sheldon Beach Hotel, and began removing records.
In the summer of 2001, four of five retail spaces were occupied: the two northernmost bays by Elizabeth's company, Swim & Fun Wear, Inc. d/b/a Swim & Fun Wear, which did not pay rent; the adjacent two bays by a restaurant tenant, Pinasse, Inc. d/b/a Chez Andre's, which struggled during the off-season to pay its rent; the next bay by Denis' company, Bikers Nest of Hollywood, Inc., which did not pay rent; and the southernmost two bays by Distinctive USA, Inc.
On July 26, 2001, First Trust filed a suit in circuit court (Case No. 01-13030(11)), (17th Judicial Circuit, Broward County) seeking foreclosure of its mortgage, and alleging that Denis was in default of making all payments due since July 1, 2001.
On August 30, 2001, Elizabeth filed an emergency motion in the divorce court seeking the appointment of a receiver, but the court deferred ruling and ordered the parties to attend mediation.
On November 21, 2001, the divorce court entered a further order clarifying that it was the court's intention that neither Denis nor Elizabeth could deal in any way with the Property or their interests in the Property, and staying the effect of Denis' conveyance of his interest to SBRI.
On October 22, 2001, Transcapital Bank executed and delivered to Elizabeth's brother, Eliezer Botton, an Assignment of Mortgage, Note and Loan Documents, which was recorded on December 6, 2001 at OR 32443/1694.
Elizabeth had mortgaged her home for $525,080 on October 17, 2001.
The Receiver took control of the Sheldon Beach Hotel and the bank account of Lounge Corp.
Among other things, the Receiver (i) filed at least one income tax return for Lounge Corp.; (ii) made at least one lease modification with retail tenant Pinasse, Inc. (approved by the court on May 2, 2002, OR 33151/1432); (iii) litigated a third party action against Elizabeth's Swim & Fun Wear from its retail space, which resulted in its eviction; (iv) litigated a third party action against Joe's Ocean Market, which resulted in a judgment canceling those leases (OR 36292/1628); (v) acted to prevent Nofal Kahook of SBRI from interfering with the Receiver's relationship with its retail tenants; (vi) made repairs; (vii) resolved a lawsuit (Case No. 02-007108, 17th Judicial Circuit, Broward County) brought by the City of Hollywood to enforce special assessment liens; (viii) filed fee applications; and (ix) paid court-approved fees to himself and his counsel, Jeff Sarrow.
During the Receivership, the Receiver solicited and received substantial funds from Eliezer.
November 2001 $ 10,000.00 to Dean Liotta November 2001 4,000.00 to Dean Liotta December 2001 3,000.00 to Dean Liotta December 2001 5,000.00 to Sheldon Hotel Lounge Corp. Unknown dates 21,000.00 to Sheldon Hotel Lounge Corp. January 2005 375,000.00 to Jeffrey Sarrow Trust Account April-May 2005 107,531.38 to Broward County Revenue Collection Division: folio # 7100 (2000-2002) April-May 2005 35,315.40 to Broward County Revenue Collection Division: folio # 7100 (2003) April-May 2005 21,988.98 to Broward County Revenue Collection Division: folio # 7500 (2000-2002) April-May 2005 9,748.14 to Broward County Revenue Collection Division: folio # 7500 (2003) April-May 2005 8,120.98 to Broward County Revenue Collection Division: folio # 8400 (2000-2002) April-May 2005 3,251.94 to Broward County Revenue Collection Division: folio # 8400 (2003) April-May 2005 6,905.75 to Broward County Revenue Collection Division: folio # 8500 (2000-2002) April-May 2005 2,986.36 to Broward County Revenue Collection Division: folio # 8500 (2003)
In addition to these, Eliezer made two other payments of real estate taxes, in the amounts of $2,986 and $180, so that the total advanced by Eliezer on receivership expenses is $617,015.
At no time did Eliezer, or the receiver, or anyone else, obtain for Eliezer either a court-approved receiver's certificate or specific court approval for Eliezer to be repaid these monies.
On one occasion, Elizabeth appealed from orders, dated April 25, 2003, awarding fees to the Receiver and the Receiver's counsel (Appeal No. 4D03-1889).
On November 27, 2002, Denis consented to the entry of a 52,500,000 money judgment in favor of Elizabeth upon her cross-claim in the First Trust foreclosure case which had been commenced in July 2001.
On August 28, 2003, the divorce court entered a Memorandum Order directing the Receiver to seek out a buyer for the
Elizabeth appealed the August 28 order to the state court of appeal (Appeal No. 4D03-3785).
Meanwhile, pursuant to authority from the divorce court, the Receiver entered into negotiations with José Saal, acting as a nominee for an undisclosed purchaser, and Mr. Saal presented an offer of $5,850,000 with $100,000 deposit.
The Receiver's October 17, 2003 motion to approve the proposed sale to Saal was first heard by the divorce court in November, and again on December 2, and again on December 23, but each time the court's determination of the motion was postponed at the request of Elizabeth, so that she could conduct discovery.
After a fourth hearing, on January 8, 2004, the divorce court on January 12 entered its Order Granting Receiver's Motion for Authorization to Accept Purchase Offer and Sell Assets of Receivership Estate. However, because Elizabeth's appeal from the court's August 28, 2003 sale procedures order was still pending, the court deferred the effectiveness of the January 12, 2004 order until the appeal of the August 28, 2003 order was completed.
During the receivership, the Receiver and others took actions to attack certain transactions which clouded the title to the Property., SBRI was permitted to intervene in the First Trust foreclosure action on March 20, 2002.
The state court of appeal issued a per curiam affirmance of the August 28, 2003 sale procedures order on November 24, 2004, and issued its mandate on December 10 (OR 38726/355).
On January 3, 2005, general magistrate Alan R. Marks issued a Report to the divorce court on the subject of debts owed by Denis to Elizabeth.
The January 3, 2005 magistrate's report also found that Denis owed Elizabeth $258,091.98 as equitable distribution and related expenses.
The magistrate's report further recommended that certain insurance proceeds taken from the hotel by Denis be charged against him if he did not furnish proof, within 30 days after entry of the order approving the recommendations, that he spent the monies on the hotel.
He and Elizabeth had previously agreed that he owed her $33,800 for her share of the roughly $80,000 in insurance proceeds that from insurance checks sometime in 1999 or 2000,
Finally, the magistrate's report recommended that $129,620 which Denis collected in rents and security deposit from Distinctive USA be charged against Denis if he did not furnish proof, within 30 days after entry of the order approving the recommendations, that he had spent them on the hotel.
The magistrate's report deferred the issue of Elizabeth's entitlement to recover for her exposure to the Receiver's and Receiver's counsel's fees. Eliezer Botton later paid $375,000 to satisfy those claims by the Receiver and his counsel, and has charged the Property for the $375,000 plus interest. There has been no adjudication by the divorce court on whether Elizabeth is entitled to the $187,500 which she claims as a part of her nonpriority claim. Because Eliezer claims the advance as part of his first mortgage lien, thereby encumbering both the estate's interest in the Property and Elizabeth's, the Court does not accept this portion of Elizabeth's claim as allowable as a separate claim against Denis. It is apparent from a review of the divorce court docket
Consequently, the total amount of Elizabeth's nonpriority claim is
On January 28, 2005, Denis, Elizabeth, SBRI and Kahook entered into a Joint Stipulation for Global Settlement Agreement (the "January 2005 settlement agreement").
Upon the joint request of Denis and Elizabeth, the divorce court discharged the Receiver effective March 1, 2005, finding that there was no reason for the receivership to continue.
On March 2, 2005, Mr. Saal filed motions (a) to reappoint the Receiver for the sole purpose of effectuating the closing of the Saal sale and (b) to treat the Lounge Corp. lease as having been included in the Saal sale or to void the lease.
Elizabeth did not control the Property, including its hotel operations and revenues, and records thereof, during the term of the receivership, from October 2001 through March 2005.
In her Direct Testimony, Elizabeth described $155,000 that she drew from the hotel in back salary for the period 1999 to 2001 in 2005.
By the time of Denis' bankruptcy, he had neither a home nor any other assets of value except his interest in the hotel.
The Trustee encountered a jumble of prepetition litigation — at least four state court suits, seven state court appeals, and a federal district court suit. The suits appear at first blush to be grounded in a series of questionable transactions by Denis: a 2000 borrowing from City First Mortgage Corporation
Upon a more careful consideration of the evidence presented, it has become clear that there are really two common themes running through the entire sorry chronology of Denis and Elizabeth's post-dissolution conflict. One is that Denis took every opportunity presented to him to derive value from his own one-half interest in the hotel, often secretly and sometimes in violation of agreements he had made with others. The other is that Elizabeth created and exploited every opportunity to derive value for herself from Denis' one-half interest in the hotel. Denis the bad husband schemed repeatedly after his divorce to leverage his own half interest. Elizabeth the vindictive wife schemed repeatedly after her divorce to cause economic injury to Denis.
Denis Chira, who has never had counsel in this bankruptcy case, is not only a poor husband, but also a poor witness. He conceded at his deposition that he has a very poor memory,
Elizabeth is even less reliable as a witness, her credibility impeached often during the trial by prior inconsistent statements and documentation. Her courtroom demeanor while testifying further eroded her credibility. She was routinely vague and evasive in response to questions which could be answered directly but where the truthful answer would be adverse to her interests.
Elizabeth has spent years obstructing the sale of the hotel in a manner which would cause damage to Denis but not to herself. How she did it requires an explanation of some length.
Seven years ago Denis and Elizabeth were a newly divorced couple with a valuable property that was worth perhaps four or five million dollars,
Denis and Elizabeth had agreed in the divorce documents to sell the property.
According to the mediation agreement incorporated into their divorce judgment, $400,000 in assets, presumably paid for or improved by Denis, but already in Elizabeth's name, was to be credited by her to his child support obligation. She was to do it by setting up a trust fund for the two daughters from her share of the hotel sale proceeds. That amount represented his lump-sum child support.
Elizabeth also had the means and the opportunity to prevent the sale, impoverish Denis, and help herself in the process. It required some ingenuity.
First, she presented a master lease in June 1999 to be signed in conjunction with the divorce agreement.
Denis was once a director of Lounge Corp.,
With the master lease in place, and as the sole director of Lounge Corp., Elizabeth could insist that any buyer of the hotel negotiate first with Lounge Corp. to buy out the long-term leasehold interest. Lounge Corp. has no other asset except the 1999 Business Lease;
There was also a substantial danger that the Lounge Corp. lease would someday be found by a court of equity jurisdiction to be merely a veneer, a sham or a device meant merely to provide insulation from premises (and, in light of the prior operation of a nightclub, alcohol-related) liability and not really meant to establish a true lessor-lessee relationship. The lease was never honored or performed, and I find that it was never even intended to be honored or performed.
Elizabeth agrees that the rental amount was set using an undefined term which meant "all the rents received from the subtenants, including escalations."
Lounge Corp. is really just the management company for the hotel.
Second, Elizabeth structured a lease of her own as an obstacle to Denis's ability to derive his fair share of the Property's value in the event that a sale were proposed. She gave Denis the opportunity to take a second store, a corner location larger than his store in the old lobby. The second store would be rent-free to Denis.
Denis leased out his store on terms consistent with the expectation that the Property would soon be sold: a one-year lease to Distinctive USA with four one-year options.
She never paid rent anyway.
The most notable thing about the Swim & Fun Wear lease is not its low rent. It is that it is a 15-year lease with no cancellation clause.
Denis took roughly $80,000 from insurance checks sometime in 1999 or 2000,
After the 2000 season, Elizabeth told Denis that there were no profits.
Denis borrowed another $150,000 against the City First second mortgage on his half of the Property.
In a mediation agreement on January 5, 2001,
After the 2001 season, Elizabeth had not paid the 2000 real estate taxes,
It was at this time (August 2001) that Denis agreed to sell his interest to Nofal "Nick" Kahook and Kahook's Sheldon Beach Resorts, Inc. ("SBRI") for a quick $50,000 and another $950,000 in the future.
During the purge period after the July 23 contempt finding against him for failure to pay child support, Denis failed to cure his one-half of the monthly payments on Transcapital's $375,000 first mortgage, which was either one or two months in arrears.
Instead she determined to buy the mortgage, leaving the property exposed to' default interest of 18%.
Although the note from the Bottons to Elizabeth requires monthly payments, it doesn't state how much the payments are, whether the principal is amortized, or when the loan matures. In fact, no payments have ever been sought or made on that note. Elizabeth testified that she hasn't given any thought to the statute of limitations,
Eliezer testified that he thought he had no risk of loss, but no prospect of gain (except the prospect of an eventual sale commission).
Around the time of his appointment, the Receiver learned that Denis had leased out a retail space to Joe's Ocean Market.
Copies of the order were served on counsel for Denis and Elizabeth, and upon Eliezer.
Elizabeth ignored the order. She rented one of the spaces to Fabio Sandino in her own name, took a security deposit, and refused to turn over the rents until the Receiver obtained a further court order requiring her to disgorge them.
Eliezer initially assisted the Receiver, advancing $43,000 for various repairs and vendor's bills.
Elizabeth unsuccessfully challenged one of the Receiver's or counsel's application for fees,
The divorce case docket
Denis's second wife, Tiffany, had him arrested in the fall of 2002 for alleged spousal abuse, and Elizabeth testified in that proceeding that his term of house arrest on an ankle monitor should not be shortened.
While she was threatening to keep his daughter from him, and to have him arrested yet again for child support defaults, Denis briefly supported Elizabeth's motion to remove Receiver, and even gave Elizabeth a $2,500,000 consent judgment,
As a result of her misconduct and Denis', Judge Korda concluded that the couple would never be able to sell the Property, and so he authorized the Receiver to find a buyer for the whole Property.
Elizabeth had few duties for the hotel,
The Fourth District Court of Appeal's order affirming the sale authorization order was entered in December 2004. By the time of the affirmance, the order approving the particular sale terms for Mr. Saal was already final and no longer subject to appeal or review. Nothing could stop the Saal sale from closing except either Saal or the Receiver backing out of the contract. Still, Elizabeth engaged in another stall tactic: She made the "global" settlement agreement with Denis and SBRI, and then sought the discharge of the Receiver in order to vitiate the Saal contract that Judge Korda had long-before approved.
Eliezer continued to make investments in the Property which he and Elizabeth thought would yield an 18% rate of return. He paid the Receiver and his counsel $375,003 for their agreement to be discharged.
Even after the filing of the involuntary bankruptcy petition against Denis and the imposition of the automatic stay provided by 11 U.S.C. § 362(a), Eliezer went to the Broward County Revenue Collector's office and paid nearly $200,000 in taxes on the Property.
Elizabeth's manifest strategy of creating obstacles to sale continued during this bankruptcy proceeding. In November and December 2005, she caused Lounge Corp. to enter into three leases that appear on their face to be long-term leases, but are accompanied by secret addenda negotiated
Earlier in 2006, Elizabeth caused Lounge Corp. to unnecessarily defend a perfectly valid wage overtime suit which Lounge Corp. lost upon the plaintiffs' motion for summary judgment.
None of the parties performed under the global settlement agreement.
Conclusions of law
The court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334, 28 U.S.C. §§ 157(b)(1), 157(b)(2)(F), 157(b)(2)(E) and 157(b)(2)(K), and the District Court's Local Rule 87.2 referring proceedings to this court.
Thirteen of the counts in the complaint are directed toward the three remaining defendants, Elizabeth, Eliezer, and Lounge Corp. Counts 1 through 6 sought the avoidance of the 2005 global settlement agreement and the 2002 consent judgment, which relief was consented to by Elizabeth at trial
Counts 2 through 4 sought to recover Denis' one-half interest in the assets (hotel, contents, and Lounge Corp. stock), and also sought to recover for the estate, pursuant to 11 U.S.C. § 550(a), the full value of the avoided prepetition transfers, in the form of one-half of the hotel's or Lounge Corp.'s income taken later by Elizabeth. Count 7 also sought the latter relief as to postpetition transfers. As a result of the avoidance of the 2005 global settlement agreement and the 2002 consent judgment, the court will treat any disproportionate recovery of profits — under whatever label — by Elizabeth since her return to the hotel in March 2005 as recoverable by the estate pursuant to § 550(a).
Count 12, as amended by the Amendment to Complaint dated April 14, 2006, seeks to equitably subordinate, below other creditors, that portion of the claim of Eliezer which seeks greater than simple interest at the pre-default contract rate against the Property. The Trustee does not seek to subordinate Eliezer's claim below the interest of Denis in any estate surplus.
Count 13 seeks to subordinate, below other creditors and below the Debtor's
Count 14 seeks an accounting of the monies that Elizabeth has recovered through her control of the hotel and Lounge Corp. since the Receiver was discharged in March 2005.
Count 15 seeks a declaration that the Lounge Corp. lease is either a sham or is the alter ego of Elizabeth and Denis that may be disregarded or merged into their hotel property ownership.
Count 16, pleading alternatively to Count 15, seeks an order directing the sale of Lounge Corp. and the partition of the proceeds between the estate and Elizabeth.
Count 17 seeks a determination of the validity, priority, and amount of Elizabeth's, Eliezer's, and Lounge Corp.'s interests in the hotel, in its contents, and in Lounge Corp. The court therefore has before it the issues of the propriety of Elizabeth's, and Eliezer's, and Lounge Corp.'s, ownership interests, lien interests, and leasehold interest in the hotel, its contents, and the Lounge Corp. stock. Because Elizabeth and Lounge Corp. have taken the position in their proofs of claim that their claims are secured by an interest in or setoff rights against Denis' interest in the Property,
The common law principle of equitable subordination has long been recognized by the Supreme Court, Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281 (1939), and is specifically adopted as one of the bankruptcy courts' equity powers by 11 U.S.C. § 510(c).
Equitable subordination law in this Circuit derives from the former Fifth Circuit's decision in In re Mobile Steel Co., 563 F.2d 692, 700 (5th Cir.1977) and holds that equitable subordination must be based upon inequitable conduct by the creditor:
In re Lifschultz Fast Freight, 132 F.3d 339, 344 (7th Cir.1997) (citing In re Mobile Steel Co., 563 F.2d at 700). The Mobile Steel test was formally adopted by the Eleventh Circuit. In re N & D Properties, Inc., 799 F.2d 726, 731 (11th Cir.1986). The test does not require that the claimant's misconduct rise to the level of an intentional tort.
The power of equitable subordination may, in appropriate circumstances, be used to subordinate even the claim of a secured creditor. See 124 Cong. Rec. H. 11,095 (Sept. 28, 1978); S 17,412 (Oct. 6, 1978); In re Tri-O-Clean, Inc., 230 B.R. 192 (Bankr.S.D.Fla.1998) (Hyman, J.) (secured claim of affiliate of management company for Debtor reduced to unsecured status).
Insiders, those in a position of influence over the Debtor, are held to a higher standard than non-insider claimants,
Strictly scrutinized, as the Supreme Court has directed, an insider's actions may subject him or her to equitable subordination on the basis of inherent unfairness alone. On this basis, in In re Lemco Gypsum, Inc., 911 F.2d 1553, 1556 (11th Cir.1990), the court held that an insider's purchase of a non-insider's judgment should cause the purchased claim to be reduced to the amount the insider paid for the judgment, since the Debtor presumably could have settled the debt for the same amount.
Under bankruptcy law, "insider" is a flexible term. Rather than defining it, the Bankruptcy Code gives non-exclusive examples. "The term `insider' includes. . . ." 11 U.S.C. § 101(31). "`Includes' and `including' are not limiting." 11 U.S.C. § 102(3). The legislative history of the 1978 Code defines an insider as a person or entity with "a sufficiently close relationship with the Debtor that his conduct is made subject to closer scrutiny that those dealing at arm's length with the Debtor." S.Rep. No. 95-989, 95th Cong., 2d Sess., reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5810.
Among the examples given are "an affiliate, or an insider of an affiliate as if such affiliate were the Debtor." 11 U.S.C. § 101(31)(E). "Affiliate" is defined as including a corporation 20% or more of whose stock is owned by the Debtor. 11 U.S.C. § 101(2)(B). Lounge Corp. was such a corporation, and Elizabeth is plainly an insider to Lounge Corp.
Even where the relationship does not fit within the examples given in the Code, a person may hold insider status. Courts that have considered the issue often hold that a former spouse is an insider as that term is used in bankruptcy law, where their relationship puts the non-debtor party in a position to exercise some degree of control or influence over the Debtor. Hunter v. Dupuis (In re Dupuis), 265 B.R. 878, 885 (Bankr.N.D.Ohio 2001) (stating that among the considerations for determining whether a former spouse is an insider are "whether [they] . . . maintain any sort of business relationship together" and "the extent to which the parties' marital assets . . . continue to be intertwined"); Browning Interests v. Allison (In re Holloway), 955 F.2d 1008 (5th Cir.1992) (former wife was insider under Uniform Fraudulent Transfers Act).
Wiswall v. Tanner (In re Tanner), 145 B.R. 672 (Bankr.W.D.Wash.1992) is illustrative of the principle that a hostile ex-wife can still be an insider. In Tanner, the Debtor had an intimate relationship with Wiswall. She borrowed money from Wiswall, who later forced her out of their joint home. Wiswall used her dominance over the Debtor to cause her to convey her one-half interest in the home to Wiswall. The court found that, on the basis of such influence, Wiswall was an insider to the Debtor even though their romantic relationship had already ended.
Elizabeth is Denis' ex-wife and the mother of Penis' children, with the power to withhold from Denis their minor daughter's visitation rights, a power which she has threatened to use to her economic advantage in relation to the hotel.
Breach of fiduciary duty
Even if Elizabeth and Eliezer were not insiders to Denis, their claims may be subordinated on the basis of specific wrongful conduct. A common type of misconduct is a breach of fiduciary duty.
Prior to the appointment of the state court receiver, Elizabeth and Denis always operated the hotel as a joint venture. A joint venture is identified by (a) an express or implied agreement to carry on some enterprise; (b) a manifestation of intent by the parties to be associated as joint venturers; (c) a joint interest as shown by the contribution of property, financial resources, effort, skill, or knowledge by each joint venturer; (d) some degree of joint proprietorship or mutual right to exercise control over the enterprise; and (e) provision for the joint sharing of profits and losses. Ely v. Shuman, 233 So.2d 169, 170 (Fla. 3rd DCA 1970) (citing Kislak v. Kreedian, 95 So.2d 510, 515 (Fla.1957)); Williams v. Obstfeld, 314 F.3d 1270 (11th Cir.2002) (adopting Florida state law standards). All of those characteristics are present in this case. Although Denis lost practical control of the
A joint venture relationship is similar to that of a partnership and is therefore governed by the principles controlling partnership law. Soler v. Secondary Holdings, Inc., 832 So.2d 893 (Fla. 3rd DCA 2002) (citing Russell v. Thielen, 82 So.2d 143, 145 (Fla.1955)).
Under the Revised Uniform Partnership Act, as adopted in Florida, a partner in a partnership owes fiduciary duties of loyalty and care. Fla. Stat. § 620.8404(1). A partner's duty of loyalty to the partnership and the other partners includes, without limitation, the following:
Id. The separate duty of care is not defined in the statute.
Fla. Stat. § 620.8404(4).
In this case, Elizabeth had a duty to do no harm to the joint venture, a duty to hold as trustee for the partnership any benefit that she derived from the partnership property, a duty not to usurp a partnership opportunity, and a duty not to deal with partnership property on behalf of one holding an adverse interest. She also had a duty of care in acting on behalf of the partnership. All of these duties were to be measured by an obligation of good faith and fair dealing.
Elizabeth violated her fiduciary duties of loyalty and care by the entire course of her conduct. She improperly removed Denis as a director of Lounge Corp. She misused Lounge Corp. in making a commercially unreasonable lease with Swim & Fun Wear for her benefit and to the detriment of Denis and in using the Swim & Fun Wear lease to attempt to shift the bulk of the value of the Property to herself. She refused to return to mediation in January 2001 as she had previously promised. She made a secret pact with her brother to use her funds to purchase the first mortgage when it was on the verge of (but not actually in) default, and to subject Denis thereby to five years of 18% interest and, through the vehicle of Eliezer's refusal to accelerate the mortgage debt, to accrue unjustified late charges. She unlawfully forced Denis to give her a consent judgment for $2,500,000, an amount grossly in excess of Denis' actual obligations to her. She engaged in a long series of unreasonable (and uniformly unsuccessful) objections, motions, and appeals, attacking either the City First second mortgage, the sale to Saal, or the Receiver and his counsel generally, causing the Receiver's and Receiver's counsel's fees to increase greatly. She rented out one of the retail spaces
She has continued to make commercially unreasonable leases in order to depress the value of the Property to Mr. Saal, revealing that each new lease had a secret "buy-out" addendum only when forced to by the Trustee's discovery requests in this proceeding. She unnecessarily defended a valid wage overtime claim, causing a $15,000 claim to become a $70,000 settlement payment from Lounge Corp. She has falsely represented to another tenant and to the state court that Denis conveyed his title to her in March 2005. She has continued to draw a grossly excessive salary even though she has hired an experienced manager for the small hotel and pays him $800 per week to undertake all day-to-day functions of administration. She has withheld important documents in this case. She has failed to account for large sums of hotel income until the eve of trial. And she cannot account for where substantial funds reported as hotel revenues and as expenses by Lounge Corp.'s accountant appear in the company's financial records.
Her underhanded conduct in impeding the sale of the Property has kept Denis in a position where he can't afford to move out of the hotel, and therefore he has continued for years to accrue charges for a hotel room averaging more than $2,000 per month, and to accrue the obligation to pay additional living expenses for his daughters which was supposed to end with the sale of the hotel under the terms of the 2000 mediation agreement, six years ago.
Elizabeth's record of economic oppression of Denis is far more heinous than Denis' record of failing to pay child support.
A claim may be subordinated only to the extent necessary to offset the harm caused by the claimant to the Debtor and its creditors. In re Mobile Steel, 563 F.2d 692, 701 (5th Cir.1977). In this case, taking into account the four settlements, the claims of creditors in this case are largely resolved. The claims, with interest on secured claims calculated through August 23, 2006, are presented below. The five claims highlighted in gray were unliquidated prior to the entry of this order.
No. Claimant Claim Amt Type Object Comments Allow AmtSecured by Entire Property: 11 Broward Co. Dept. of Finance $64,026.81 P Yes a/o 8/2006 = $133,239 133,239.00 19 Eliezer Botton $1,525,183.22 S Yes Excessive 1,142,949.00 Secured by Denis' Half of the Property:832,444.11 16 First Trust Corp. as Trustee $1,230,664.66 S Yes Settled - CP 223 19,500.00 8 Barry G. Roderman & Associates, P.A. $150,757.19 S No Settled - CP 224 126,094.89 9 Barry G. Roderman & Associates, P.A. $90,823.53 S No Settled - CP 224 86,523.31 7 Superior Moving & Storage, Inc. $4,908.67 S No Allowed 5,684.38 14 Sheldon Hotel Lounge Corp. $79,860.00 S Yes Excessive 34,500.00 15 Nofal Kahook/Sheldon Beach Resorts Inc. N/A Yes Settled - CP 226 50,000.00 Priority Claims:13 Elizabeth Chira $4,555,215.45 S.P.U Yes Excessive 360.059.66 6 Internal Revenue Service $8,680.16 P Yes Paid 0.00 Barry G. Roderman & Associates, P.A. Ch 7 admin exp - CP 224 7,301.00 General Unsecured Claims:10 Carter Schwartzreich & Yates $4,000.00 U No 4,000.00 1 Worldwide Asset Purchasing, LLC $1,719.39 U No 1,719.39 12 Florida Power & Light $2,095.85 U Yes Paid 0.00 13 Elizabeth Chira see above U Yes Excessive 179,241.69 15 Nofal Kahook/Sheldon Beach Resorts Inc. N/A Yes Settled - CP 226 40,000.00 17 Tiffany Walker/Marika Toiz $2,500,500.00 U Yes Excessive to be determined 18 Tiffany as PR of Est. of G. Walker $15,000.00 U No 15,000.00
This chart does not take into account the possibility that Mr. Saal will have a massive claim, including possibly for consequential damages, if the Trustee ultimately rejects Mr. Saal's executory contract. This could happen in any of at least three ways, according to the Trustee's motion to assume executory contract which the court granted on June 5, 2006:(1) if Elizabeth is unsuccessful, in her appeal from the June 5 order, in establishing that the discharge of the state court receiver caused Mr. Saal's contract to become unenforceable, but is successful in her appeal in establishing hat a Trustee may not avoid the effect of 11 U.S.C. § 363(i) by assuming a prepetition sale contract; or (2) if this court declines to find that the Lounge Corp. lease is a sham; or (3) if this court rules that the estate must split the $2,000,000 premium 50/50 with Elizabeth. The latter two issues are resolved here.
I conclude, and equity dictates, that Elizabeth not receive half of the $2,000,000 premium offered by Saal to the estate in exchange for the court's approval of the assumption of the Saal contract. By its own terms, the addendum to the contract between the Trustee and Saal specifically provides that all of the extra funds would be paid to the estate. While that contractual term agreed to by Saal and the Trustee could be seen as self-serving by the Trustee, it remains the case that Elizabeth is unalterably opposed to the sale to Saal.
Elizabeth is entitled to a § 507(a)(7)
Eliezer Botton's obligations
Ordinarily, Eliezer Botton would have had no fiduciary duty to the joint venture or to Denis as joint venturer. His interest, as a holder of a note and mortgage, was known to be adverse to the Property. "When the parties are dealing at arm's length,
But fiduciary duties may be imputed by the course of conduct between the parties. Maxwell v. First United Bank, 782 So.2d 931, 933 (Fla. 4th DCA 2001). When a fiduciary relationship is implied in law, it is based on the specific facts and circumstances surrounding the transaction and the relationship of the parties. Id. at 933. This can arise when "confidence is reposed by one party and a trust accepted by the other." Id. at 934 (citing Capital Bank v. MVB Inc., 644 So.2d 515, 518 (Fla. 3d DCA 1994) (quoting Dale v. Jennings, 90 Fla. 234, 107 So. 175, 179 (1925))). In this sense, breach of fiduciary duty is a broad theory of recovery which "can include conduct which is merely negligent but does not rise to a level of fraud." Niles v. Mallardi, 828 So.2d 1076, 1078, n. 1 (Fla. 4th DCA 2002); Horizons Rehabilitation, Inc. v. Health Care and Retirement Corp., 810 So.2d 958, 964 (Fla. 5th DCA 2002) (a breach of fiduciary duty need not rise to the level of an intentional tort). "If a relation of trust and confidence exists between the parties (that is to say, where confidence is reposed by one party and a trust accepted by the other, or where confidence has been acquired and abused), that is sufficient as a predicate for relief." Doe v. Evans, 814 So.2d 370, 374 (Fla.2002) (quoting Quinn v. Phipps, 93 Fla. 805, 113 So. 419, 421 (1927)).
District Judge Highsmith has commented that conduct which abuses a confidential relationship is actionable under the aegis of constructive fraud:
Banco Latino International v. Gomez Lopez, 95 F.Supp.2d 1327, 1335 n. 9 (S.D.Fla. 2000).
Halkey-Roberts Corp. v. Mackal, 641 So.2d 445, 447 (Fla. 2d DCA 1994) (employee's unauthorized use of corporate funds), quoting Douglas v. Ogle, 80 Fla. 42, 85 So. 243, 244 (Fla.1920).
Ordinarily, to establish a fiduciary or confidential relationship between the parties, there must be a showing of substantial evidence indicating dependency by one party and some undertaking by the other party to advise, counsel, and protect the weaker party. See Lanz v. Resolution Trust Corp., 764 F.Supp. 176, 179 (S.D.Fla. 1991); O'Halloran v. First Union National Bank of Florida, 205 F.Supp.2d 1296, 1301 (M.D.Fla.2002), aff'd 350 F.3d 1197 (11th Cir.2003). Moreover, evidence that one party placed trust or confidence in the other party does not create a fiduciary relationship in the absence of "some recognition, acceptance or undertaking of the duties of a fiduciary on the part of the other party." Lanz, 764 F.Supp. at 179 (citing Harris v. Zeuch, 103 Fla. 183, 137 So. 135 (1931)); Barnett Bank of West Florida v. Hooper, 498 So.2d 923 (Fla. 1986).
Courts have sometimes found a breach of fiduciary duty even among parties who are ostensibly dealing with one another at arm's length, such as the relationship between borrowers and lenders, "where the bank knows or has reason to know of the customer's trust and confidence under circumstances exceeding an ordinary `customer relationship'", or where the customer is "relying on the bank so as to counsel and inform him" or in some cases where the lender takes on extras services for a customer, receives any greater economic benefit than from a typical transaction, or exercises extensive control. Capital Bank v. MVB, Inc., 644 So.2d 515, 519-521 (Fla. 3d DCA 1994), rev. denied, 654 So.2d 918 (Fla.1995) (bank took advantage of its knowledge of customer's weakness to pressure it to buy overvalued equipment from another bank customer); Susan Fixel, Inc. v. Rosenthal & Rosenthal, Inc., 842 So.2d 204, 208 (Fla. 3d DCA 2003) (factor which orchestrated an agreement with third party by which borrower's finances suffered further decline may have breached fiduciary duty).
It is not necessary that the defendant have personally benefited from the breach. Ft. Myers Development Corp. v. J.W. McWilliams Co., 97 Fla. 788, 122 So. 264, 268 (1929) (aiding and abetting a breach of fiduciary duty); In re Koszuth, 43 B.R. 104, 107 (Bankr.M.D.Fla.1984) (misappropriation of trust property); In re Pieper, 119 B.R. 837, 840 (Bankr.M.D.Fla. 1990) (same, in dicta).
A breach of fiduciary duty can also form the basis for an independent tort of civil conspiracy. Blatt v. Green, Rose, Kahn & Piotrkowski, 456 So.2d 949, 951 (Fla. 3d DCA 1984) (attorney assisted personal representative in distributing estate
Restatement of Torts (Second) § 8'16(a), comment. However, a civil conspiracy does not require more than knowledge and general participation in the conspiracy to commit a civil wrong. Von v. Randazzo, 674 So.2d 892 (Fla. 5th DCA 1996).
Eliezer Botton isn't a stranger who purchased a mortgage, becoming an arm's — length lender in the process. He is Elizabeth's brother. He was the friend of Denis who introduced Denis to Elizabeth thirty years before. He was the broker to whom Denis and Elizabeth gave the listing on the hotel,
A few months later, at a time when Denis was known to be in financial distress — the second mortgage on his interest in the hotel having just gone into foreclosure and Denis having been held in contempt for his failure to pay child support to Elizabeth — Eliezer entered into separate negotiations, confidentially with Elizabeth, by which she would loan him $373,276.85 at 18% interest to purchase the first mortgage in Eliezer's name rather than keeping the loan current. Through this charade, Eliezer meant to enable Elizabeth to collect back both her share and Denis' share of the property's debt service at the 18% default rate of interest. To compound the harm to Denis and Elizabeth, Eliezer as the new mortgage holder improperly compounded the interest charged, creating the appearance of an encumbrance growing much faster than
Eli Botton's and Elizabeth's Entitlement to 18% Interest: Effect on Denis' Equity in Hotel
Above is a chart
The chart is designed to match the actual effect of the liens. Increases in the First Trust and Roderman judgments affect only Denis' one-half interest in the property, while the increases or decreases in Eliezer Botton's claim, real estate taxes,
During the trial, Eliezer conceded that he cannot charge compounded interest under the Family Bank note and mortgage. Nonetheless, it can be easily seen from the chart that, if Eliezer earns 18% simple interest, Denis' bankruptcy estate's equity in the property may be exhausted during the course of Elizabeth's appeals from the court's June 5, 2006 order and her likely appeals from this order.
By his actions, Eliezer conspired with Elizabeth to assist her in breaching her fiduciary duties to Denis, and Eliezer breached his own fiduciary duties that arose by virtue of the position of confidence he held as the Chiras' real estate broker, brother, and friend. On balance, the evidence shows that he also engaged in inherently unfair conduct by an insider, such as should subject his claim to subordination.
The court finds that Eliezer Botton's claim, though secured, should be subordinated to the claims of all other creditors, to the extent the interest portion of his claim exceeds the nondefault rate of interest on $348,631 in principal and $617,015 in receivership expenses, aggregating a principal balance of $965,646. The nondefault rates are set forth in the chart which is incorporated into ¶ 3(b) of the Direct Testimony of Sonya Salkin, and total $177,303 through August 23, 2006, thus aggregating $1,142,949 through that date and $205.03442 per day afterward.
Eliezer is not entitled to recover attorney's fees, as he is not the prevailing party in this action. The Trustee may file a motion to assess attorney's fees within 30 days from the entry of the judgment.
Disregard of sham lease
Section 105(a) of the Bankruptcy Code, in providing that "the court may issue any order, process or judgment that is necessary or appropriate to carry out the provisions of this title," provides supplemental authority to the All Writs Statute, 28 § 1651, which has similar language. Together, the two statutes are the source of the bankruptcy court's equity jurisdiction. See H. Rep. No. 95-595, 95th Cong., 1st Sess., 316 (1977),
Pepper v. Litton, 308 U.S. 295, 304-05, 60 S.Ct. 238, 84 L.E d. 281 (1939) (internal citations omitted).
Federal courts exercising their equity jurisdiction have repeatedly found that they may direct that a lease between insiders, the terms of which were never performed, be disregarded as a sham. See Staats v. Butterworth Properties, Inc. (In re Humble), 19 Fed.Appx. 198, 2001 WL 1006148 (6th Cir.2001); B & M Leasing Corp. v. United States, 331 F.2d 592 (5th Cir.1964); United States v. Rockwell, 677 F.Supp. 836 (W.D.Pa.1988); MCI Telecommunications v. O'Brien Marketing, Inc., 913 F.Supp. 1536 (S.D.Fla.1995).
In Bennett v. Hollingsworth (In re Hollingsworth), 224 B.R. 822 (Bankr.M.D.Fla. 1998), the Debtor produced an assignment of his stock interest in an aircraft holding company, LexAir, to his future son-in-law, and a lease by which LexAir leased the aircraft back to the Debtor, the rental consisting of all operating costs. Id. at 826-27. The Debtor ignored the terms of the lease, but maintained possession of the aircraft and paid LexAir only $75 per hour of actual flight time. Id. Noting that the lease was commercially unreasonable, and that the Debtor received no consideration in exchange for his stock, Judge Paskay held that both transactions would be disregarded in favor of the true state of affairs, which was that the Debtor was the owner of LexAir's assets. Id. at 829.
In this case, the 1999 Business Lease entered into between the Chiras and Lounge Corp. was neither performed nor intended to be performed. The court finds that it was a sham intended to provide merely a property manager for the hotel,
Lounge Corp. is a mere instrumentality of the Chiras, initially intended to shield the Property and themselves from potential tort liability, and subsequently used by Elizabeth to defraud Denis and his estate. Under Florida law, the corporate veil can be pierced where there is a showing both of domination or control such as would make a company the alter ego of its parent and of other improper conduct. Seminole Boatyard, Inc. v. Christoph, 715 So.2d 987, 990 (Fla. 4th DCA 1998), and Mullin v. Dzikowski, 257 B.R. 356 (S.D.Fla.2000) (both citing Dania Jai-Alai Palace, Inc. v. Sykes, 450 So.2d 1114, 1121 (Fla.1984)). In the context of creditor actions, the rule is often stated as mere-instrumentality-plus-fraud: ". . . it must be shown not only that the wholly-owned subsidiary is a mere instrumentality of the parent corporation but also that the subsidiary was organized or used by the parent to mislead creditors or to perpetrate
Examples of improper conduct are where the corporation is in actuality the alter ego of the stockholders and was organized or after organization was employed by the stockholders for fraudulent or misleading purposes, or in some fashion that the corporate property was converted or the corporate assets depleted for the personal benefit of the individual stockholders, or that the corporate structure was not established in good faith or, in general, that property belonging to the corporation can be traced into the hands of the stockholders. Walton v. Tomax Corporation, 632 So.2d 178 (Fla. 5th DCA 1994). The Fourth District Court of Appeal has given these examples: the use of a sham corporation to accomplish some ulterior purpose, evade some statute or to accomplish some fraud, or use of the corporation for fraudulent or misleading purposes, especially of creditors. Steinhardt v. Banks, 511 So.2d 336, 339 (Fla. 4th DCA 1987). The use of a shell subsidiary to hold a lease while the parent operated its business in the leased premises subjects the parent to liability under alter ego theory for the subsidiary's obligation to the landlord, where the subsidiary had no bank account, capital, or assets, and where the subsidiary executed the lease which provided that the tenant would "operate" an auto parts store in the premises. USP Real Estate Investment Trust v. Discount Auto Parts, Inc., 570 So.2d 386 (Fla. 1st DCA 1990). And a parent corporation must be held liable for its subsidiary's debt where the subsidiary had no bank account, no assets, no capital, and no employees, and the subsidiary had entered into the contract with the creditor knowing that it had no ability to perform the contract because all of its revenues are deposited directly to the parent's account. Ocala Breeders' Sales Co. v. Hialeah, Inc., 735 So.2d 542 (Fla. 3d DCA 1999).
This is not a creditor action. Nonetheless, the Court of Appeals for the Eleventh Circuit has held that a Trustee may bring an action, frequently called a Trustee's "reverse piercing" action, to draw the assets of the Debtor's mere instrumentality into the Debtor's estate. She may bring the action so long as piercing the corporate veil is an action available under state law in those circumstances to creditors generally. In re Icarus Holding, LLC, 391 F.3d 1315, 1321 (11th Cir.2004). Some bankruptcy courts have even permitted substantive consolidation of Debtor corporations and non-Debtor corporations upon equitable grounds. See, e.g., In re Lease-A-Fleet, Inc., 141 B.R. 869 (Bankr. E.D.Pa.1992); In re New Center Hospital, 179 B.R. 848 (Bankr.E.D.Mich.1994); In re Munford, Inc., 115 B.R. 390 (Bankr. N.D.Ga.1990).
The court believes that it is unnecessary to conduct an analysis of whether Lounge Corp. should be substantively consolidated with Denis' estate, and that to do so might work an injustice on Elizabeth, who still owns one half of the corporate stock. The case law on piercing, and reverse piercing, the corporate veil is illustrative of the extent to which equity may be invoked by bankruptcy courts to assure an equitable result. It is sufficient for the purposes of equity that the Lounge Corp. lease be found to be of no further effect from this date forward.
Lounge Corp. has asserted a claim for $79,900 in rents not paid by Denis for the use of his room in the hotel, at a rate of $2,500 during the four in-season months and $2,000 for the out-of-season months. However, Elizabeth already has an award
A separate judgment will be entered in accordance with Fed. R. Bankr.P. 9021.