Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

In re Daughtrey

United States Court of Appeals, Eleventh Circuit

July 24, 2018

In re: CECIL DAUGHTREY, JR., PATRICIA A. DAUGHTREY, Debtors.
v.
LUIS E. RIVERA, II, Defendant-Appellee. CECIL DAUGHTREY, JR., PATRICIA A. DAUGHTREY, Plaintiffs-Appellants,

          Appeal from the United States District Court for the Middle District of Florida D.C. Docket No. 2:15-cv-00029-JES; 8:13-bkc-14831-FMD

          Before TJOFLAT, ROSENBAUM and SENTELLE, [*] Circuit Judges.

          OFLAT, 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.

         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.

         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, 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 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 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.

         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. 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.

         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 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 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 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 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 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 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.

(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]

         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 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 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 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.

         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]

         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 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 $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. . . . 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 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 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.

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 of Gilberti's post-petition liens and ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.