Thomas J. Tucker, United States Bankruptcy Judge.
This Chapter 11 bankruptcy case is before the Court on the Debtor's objection to the claim of Prime Financial, Inc. (Docket
This Opinion states the Court's findings of fact and conclusions of law. For the reasons stated in this Opinion, the Court will enter an order sustaining the Debtor's Claim Objection in part, and overruling it in part, and ordering that Prime has an allowed, nonpriority, unsecured claim in this bankruptcy case in the reduced amount of $ 1,356,044.45.
This Court has subject matter jurisdiction over this contested matter under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a)(E.D. Mich.). This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), 157(b)(2)(B), and 157(b)(2)(O).
This proceeding also is "core" because it falls within the definition of a proceeding "arising in" a case under title 11, within the meaning of 28 U.S.C. § 1334(b). Matters falling within this category in § 1334(b) are deemed to be core proceedings. See Allard v. Coenen (In re Trans-Industries, Inc.), 419 B.R. 21, 27 (Bankr. E.D. Mich. 2009). This is a proceeding "arising in" a case under title 11, because it is a proceeding that "by [its] very nature, could arise only in bankruptcy cases." See id. at 27.
The Debtor, TAJ Graphics Enterprises, LLC, referred to in this Opinion as the "Debtor," is a Michigan limited liability company that was formed in 1998. At all relevant times, the Debtor has been managed and controlled by Robert Kattula, its president, and its members have been members of Robert Kattula's immediate family — his wife Maria Kattula and their children — and/or trusts controlled by Maria Kattula.
Prime Financial, Inc., referred to in this Opinion as "Prime," is a Michigan corporation owned and operated by Aaron Jade. In this Chapter 11 case, Prime filed an amended proof of claim, asserting a nonpriority, unsecured claim for $ 2,237,000.00. Prime's claim is based on a plan that was confirmed in 2004, in a previous Chapter
The Debtor contends that Prime has no valid claim against it, and seeks disallowance of Prime's claim in its entirety. The Debtor alleges that Prime's claim under the confirmed plan in the Debtor's 2003 bankruptcy case was paid in full. The Debtor advances several theories in support of its payment defense, and these are discussed below.
The present dispute has roots in the Debtor's first Chapter 11 case. The Debtor filed its first Chapter 11 case in this Court on December 23, 2003, Case No. 03-75414 (the "2003 Case"). In that case, the Debtor proposed, and the Court ultimately confirmed, a Chapter 11 plan. The Debtor's combined plan and disclosure statement was filed on June 30, 2004.
The 2004 Plan described the Debtor as "a real estate holding company which owns five parcels of industrial property ... located in Cleveland, Ohio."
In the 2003 Case, Prime was listed in the Debtor's Schedule D, as a junior secured creditor, holding a "2nd position all asset lien," with a claim in the amount of $ 1.2 million, the "unsecured" portion of which was the entire $ 1.2 million. The Debtor's Schedule D did not list Prime's claim as being contingent, unliquidated, or disputed.
The Plan's "Effective Date" was defined as "the first Business Day after the tenth day after the Confirmation Date," and "Confirmation Date" meant the date of entry of the order confirming the Plan.
Thus, the 2004 Plan required that Prime's $ 1.2 million allowed claim be paid in full no later than 5 years after October 12, 2004 — i.e., no later than October 12, 2009. The 2004 Plan contained further requirements regarding the treatment of Prime's Class I, $ 1.2 million allowed claim. It stated:
Putting the above provisions from the 2004 Plan together, then, the Plan required the Debtor to pay Prime's allowed $ 1.2 million claim by making monthly payments commencing on Wednesday, April 13, 2005,
Some further explanation of the 2004 Plan is required. In the 2004 Plan as initially proposed, § 3.1.4, quoted above, granted Prime a "Lien against the Real Estate to secure the payment of the Prime Financial Indebtedness."
The 2004 Plan defined "Real Estate" to mean "all real property owned by the Debtor," and the definition further stated that "Real Estate" included, in substance, all of the Debtor's rights relating to such real property, including "[a]ll of the rents, issues, income and profits of the Real Estate," and "equipment ... in or upon the Real Estate and used or usable in connection with any present or future operation of the Real Estate."
The 2004 Plan, as later amended and confirmed, stated that the Debtor owned four parcels of real estate in Cleveland, Ohio. These were grouped in two groups of two parcels each, for purposes of disposition under the Plan. The first group was labeled the "Rockefeller Property" and was "[t]he property commonly known as 2777 and 2779 Rockefeller Drive" in Cleveland. The second group was labeled the "Transport Property" and was "[t]he property commonly known as 2727 and 2655 Transport Road" in Cleveland.
The 2004 Plan stated that K & B Capital, LLC ("K & B") had a first mortgage in the Real Estate, which secured a debt of $ 2.4 million. K & B was an entity owned and controlled by Robert Kattula and his family, and K & B had purchased the mortgage debt from Finova Corporation.
Under the 2004 Plan as originally proposed, the Debtor's Real Estate was to be sold free and clear of all liens and interests, except secured property taxes and the secured indebtedness owing to Prime under the 2004 Plan. The sale would be subject to those liens, but no others.
Under the 2004 Plan as ultimately modified and confirmed, the provisions regarding the sale of the Real Estate changed. The changes were contained in the "2004 Plan Amendments."
First, at the option of K & B, the successful auction bidder,
Second, the sale of the Rockefeller Property could be made either to K & B, or, at K & B's option, to Water and Wastewater Laboratories, Inc., rather than to K & B. But a transfer by the Debtor of the Rockefeller Property to Water and Wastewater Laboratories, Inc., rather than to K & B, had to be completed on or before September 30, 2004, unless the Debtor extended that deadline. In either case, real estate taxes were to be paid, but otherwise the sale of the Rockefeller Property was to be free and clear of all liens, with liens being transferred to the sale proceeds.
Prime did not object to the 2004 Plan; rather, Prime voted to accept the Plan.
As to Prime, what emerged from the confirmation of the Debtor's Plan in the 2003 Case was that Prime had a claim for $ 1.2 million plus interest, which had to be paid by the Debtor, according to the 2004 Plan's payment terms. The primary issue now before the Court is whether, and to what extent, if any, Prime's claim was actually paid (or must be deemed paid).
Before discussing the Debtor's various theories as to why Prime's claim should be deemed paid, the Court will address two preliminary issues — namely, the interest rate applicable to Prime's claim; and the burden of proof on the Claim Objection.
Some further explanation is required of the interest rate that applies to Prime's claim under the 2004 Plan. As noted above, the 2004 Plan provided that Prime's $ 1.2 million claim was to be paid in full during the 5-year period after the Effective Date of the Plan, with interest at the "Interest Rate." The Plan defined "Interest Rate" this way:
Under this definition, there are three possible interest rates. The first of these, under subsection (a) of the definition, is "the higher of (I) five (5%) percent, or (ii) the interest being paid or earned on a five (5) year treasury note as published by the Wall Street Journal on the Confirmation Date." This choice translates to a rate of 5% per annum. That is because that rate was higher than "the interest being paid or earned on a five (5) year treasury note as published by the Wall Street Journal on the Confirmation Date." The "Confirmation Date" was the date on which the order confirming the 2004 Plan was entered,
The second possible interest rate under the 2004 Plan's definition of "Interest Rate" is the "contract rate." In Prime's case, the "contract rate" was 17% per annum. It is undisputed that 17% was the non-default interest rate on Prime's loans to K & B that the Debtor had guaranteed,
The third possible interest rate under the 2004 Plan's definition of "Interest Rate" is "such other interest rate as may be determined by Final Order of the Bankruptcy Court." "Final Order" means, essentially and in pertinent part, "an order of the Bankruptcy Court" that is no longer subject to modification on appeal.
This leaves two possible choices under the definition of "Interest Rate:" 5% or 17%. But until the oral closing arguments, made after the conclusion of all the evidence in the very lengthy evidentiary hearing, the Debtor and Prime
Prime's amended proof of claim filed in this case, which is the subject of the Claim Objection, is clearly and explicitly based on the 2004 Plan's provisions, and is for $ 1.2 million plus interest calculated at the contract interest rate of 17%. In objecting to that amended claim, the Debtor never disputed that the applicable interest rate under the 2004 Plan is the contract rate of 17%, until after the evidence closed in the very long evidentiary hearing.
Nor did the Debtor's attorney, or any witness, ever dispute or question the 17% interest rate during the course of the evidentiary hearing. During the evidentiary hearing, Prime's President, Aaron Jade, testified to his understanding that the applicable interest rate under the 2004 Plan is 17%.
Finally, in the Debtor's two closing briefs, filed after the close of the evidence, the Debtor never disputed or questioned the 17% interest rate.
After the close of the evidence, and after the parties had filed their closing briefs, the Debtor obtained a new attorney, who then argued during the oral closing argument that the 2004 Plan is ambiguous and that the 17% rate might not apply to Prime's claim. But even while making that argument, the Debtor's new counsel did not dispute that the evidence pointed only to a 17% interest rate:
This belated argument about the interest rate was forfeited by the Debtor, (1) because it came much too late and after the close of the evidence in this very lengthy evidentiary hearing, and (2) because the Debtor actually admitted during the evidentiary hearing, through its counsel, that the applicable interest rate is 17%.
In addition, this belated argument by the Debtor would fail even if it were not forfeited. The Court finds that even if the 2004 Plan's definition of "Interest Rate" is ambiguous, as applied to the 2004 Plan's treatment of Prime's $ 1.2 million claim, such ambiguity is eliminated by the evidence presented, including the testimony of Prime's Aaron Jade, and the admission of the Debtor's counsel, quoted above. And such evidence shows that the parties have understood the applicable interest rate to be the "contract rate" of 17% per annum. Moreover, of the two possible choices of interest rate under the 2004 Plan — 5% or the contract rate of 17% — it is more reasonable to assume that the Debtor and Prime each intended that the rate be 17%, since that was the consistent and well-established contract rate for all of Prime's loans to K & B that the Debtor had guaranteed. By contrast, the rate of 5% bore no relation whatsoever to the course of dealing between Prime, K & B, and the Debtor.
Prime's claim in this case is before the Court on Prime's amended proof of claim.
Prime's amended proof of claim meets the requirements of Rule 3001(a) and 3001(b), in that it conforms substantially with the appropriate Official Form that was in effect when the proof of claim was filed, and the proof of claim was signed by Prime's authorized agent, namely, Prime's attorney. But Prime's amended proof of claim does not meet the requirement of Rule 3001(c)(1), because the claim is based on one or more writings that were not attached to the proof of claim — i.e., the documents making up the Debtor's confirmed Plan in the 2003 Case (the 2004 Plan, the 2004 Plan Amendments, and the Order Confirming Plan). This is a technical, non-material violation of Rule 3001(c)(1), however, because the missing
Nonetheless, because of Prime's failure to comply with Rule 3001(c)(1), Prime's proof of claim is not "prima facie evidence of the validity and amount of" Prime's claim, under Rule 3001(f). But as it turns out, that does not matter in this case, because the "lack of prima facie validity" under Rule 3001(f) "simply means that the claimant must submit evidence establishing its right to payment from the debtor." In re Leverett, 378 B.R. 793, 802 (Bankr. E.D. Tex. 2007) (citation omitted). In the extensive evidentiary hearing held in this case, Prime met its burden of submitting ample evidence in support of its claim.
Even if Prime's amended proof of claim was sufficient to constitute "prima facie evidence of the validity and amount of" Prime's claim, that would mean only that the Debtor, as the party objecting to the claim, "ha[d] the burden of going forward in contradicting the claim." In re ProMedCo of Los Cruces, 275 B.R. 499, 503 (Bankr. N.D. Tex. 2002) (citations omitted). Or, as one case puts it, when there is prima facie validity, "[t]he claimant will prevail unless the objecting party produces evidence at least equal in probative force to that offered by the proof of claim and which, if believed, would refute at least one of the allegations that is essential to the claim's legal sufficiency." Leverett, 378 B.R. at 799 (citations omitted).
Thus, when the prima facie presumption does not apply to a proof of claim, the result is the same as when the presumption applies but is adequately rebutted by evidence. The result is that "whichever party would have the burden of proof respecting the claim outside of bankruptcy bears that same burden in bankruptcy." See id. (citations omitted).
In this case, even if Prime's amended proof of claim did constitute prima facie evidence of the claim's validity and amount, under Rule 3001(f), the Debtor presented sufficient evidence to rebut such prima facie evidence, such that any presumption in favor of Prime's claim falls away. This means that the normal burdens of proof placed on the parties by substantive law apply to Prime's claim and to the Claim Objection.
The Debtor's objection to Prime's claim is in the nature of a defense of payment. The Debtor does not dispute that Prime had a valid claim based on the confirmed 2004 Plan in the Debtor's 2003 Case. But the Debtor alleges, based on several different theories, that Prime's claim was paid in full, or must be deemed paid in full. Under Michigan law, such a defense of payment is an affirmative defense, on which the party asserting the defense bears the burden of proof. See, e.g., In re Dunneback's Estate, 302 Mich. 73, 4 N.W.2d 472, 474 (1942); Smith v. Smith, 262 Mich. 60, 247 N.W. 106 (1933); Estate of Degoede by Trader v. Comerica Bank, No. 339577, 2018 WL 3998764, at *3 (Mich. Ct. App. Aug. 21, 2018); Mich. Ct. R. 2.111(F)(3)(a). Michigan law applies here, because the confirmed 2004 Plan says so.
Thus, the Debtor has the burden of proving its defense of payment, by a preponderance of the evidence. See generally Leverett, 378 B.R. at 799 (quoted above).
This conclusion is further compelled by the United States Supreme Court's decision in Raleigh v. Illinois Dep't of Revenue, 530 U.S. 15, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000). In that case, the Supreme Court held that on a claim objection in a bankruptcy case, the burden of proof is the same as what it would be under applicable law outside of bankruptcy. The burden of proof established by nonbankruptcy law applies, the Court held, because the burden of proof is part of the substantive law governing the claim. See 530 U.S. at 17, 20-21, 120 S.Ct. 1951.
In Raleigh, a Chapter 7 trustee objected to a claim by the State of Illinois for an unpaid use tax allegedly owed by the debtor, as a responsible officer of a non-debtor corporation. The state's tax code placed the burden of proof on the responsible officer of the taxpayer, in order to avoid personal liability for the corporation's tax debt. The state law required the officer to prove that he did not meet one of the two statutory requirements for liability. Those requirements were that the corporate officer had "the control, supervision or responsibility of filing returns and making payment of the amount of" the tax at issue; and that the officer "willfully fail[ed] to file the return or make the payment." 530 U.S. at 18, 120 S.Ct. 1951. Under Illinois law, the corporate officer bore the burden of proof to negate at least one of those elements, in order to avoid liability.
The Supreme Court held that in objecting to the state's claim, the Chapter 7 trustee had the same burden of proof that the debtor would have had outside of bankruptcy. The Court noted that "[t]he `basic federal rule' in bankruptcy is that state law governs the substance of claims." 530 U.S. at 20, 120 S.Ct. 1951 (citation omitted). And the Court held that "[g]iven its importance to the outcome of cases, we have long held the burden of proof to be a `substantive' aspect of a claim. That is, the burden of proof is an essential element of the claim itself; one who asserts a claim is entitled to the burden of proof that normally comes with it." Id. at 20-21, 120 S.Ct. 1951 (citations omitted).
In this case, the creditor, Prime, has met its burden of proof with respect to its amended proof of claim in this case, except for a minor adjustment that is needed to the interest component of Prime's claim. Interest on the $ 1.2 million claim amount did not begin to accrue on October 1, 2004, as Prime's claim assumes. Rather, the interest began to accrue on the Effective Date of the 2004 Plan, which was October 12, 2004. And as Prime's claim calculates, such interest accrued at the rate of 17% per annum, to the date on
Under these circumstances, the Debtor has the burden of proving payment, by a preponderance of the evidence. Prime's claim is subject to possible reduction, as to principal and/or interest, if and to the extent the Debtor has met its burden of proving its affirmative defense of payment.
As noted above, Prime had a $ 1.2 million claim that was allowed in the Debtor's 2003 Case, and that the Debtor's 2004 Plan required to be paid in full with interest no later than 5 years after the Plan's Effective Date (i.e., no later than October 12, 2009). The Debtor's first theory for disallowing Prime's claim in the current Chapter 11 case is that Prime's $ 1.2 million claim was paid in full in early October 2004, shortly after the Debtor's 2004 Plan
The facts alleged by the Debtor in support of its theory are complex. For these facts, the Debtor relies primarily on the testimony of its President, Robert Kattula and of his bookkeeper and assistant, Dusica Simovski, and on several documents that were admitted into evidence.
Before the Debtor filed its 2003 Case on December 23, 2003, it had guaranteed two loans that Prime made to K & B. The first loan, which the Court will refer to in this Opinion as the "K & B Cleveland loan" (a name used by the parties for that loan), was made by Prime to K & B in 2001, originally in the amount of $ 525,000.00, and had been refinanced in 2003, at which time Prime loaned another $ 900,000.00 to K & B. Thus, the total principal amount of the K & B Cleveland loan was $ 1.425 million. The second loan, which the Court will refer to in this Opinion as the "Luna Pier loan" (also a name used by the parties for that loan), was made by Prime to K & B in 2002, in the principal amount of $ 1.25 million.
When the Debtor filed its 2003 Case, its only debt to Prime was based on its having guaranteed K & B's repayment of the K & B Cleveland loan and the Luna Pier loan. (The Debtor itself had never borrowed money from Prime.)
The Debtor claims that Prime's claim was paid in full by two wire transfers that were made to Prime in early October 2004. These two wire transfers are discussed separately below.
As noted above, the Debtor's 2004 Plan was confirmed on September 29, 2004. Two days later, on October 1, 2004, Kattula caused a wire transfer to be made to Prime by a third party (discussed below), in the amount of $ 1,813,228.85.
It is undisputed that the third party who wired the $ 1.813 million to Prime on October 1, 2004 was GEM. As noted above, the Debtor had leased part of its Transport Property in Cleveland to GEM, and the 2004 Plan, as modified and confirmed, provided for Debtor to sell the Transport Property to GEM. The $ 1.813 million amount represented GEM's payoff, owed to K & B, on a $ 1.95 million promissory note GEM had made in favor of K & B in July 2003.
GEM's $ 1.95 million promissory note to K & B had been given as part of a settlement made in July 2003. The terms of the settlement are contained in a written settlement agreement dated July 30, 2003, which incorporated and supplemented a letter agreement dated June 20, 2003.
The Debtor had disclosed some of the terms of this settlement agreement in the 2004 Plan Amendments, filed in the 2003 Case on September 1, 2004.
The Debtor claims that all of the $ 1,341,518.41 that Prime received and retained from the October 1, 2004 wire transfer from GEM, which included the $ 1,235,491.12 payoff of the K & B Cleveland loan, should be deemed to be a payment by the Debtor to Prime of Prime's $ 1.2 million claim under the 2004 Plan.
Prime disputes that any such assignment was done on October 1, 2004 as claimed by the Debtor, rather than much later, if at all.
This assignment was done, according to the Debtor, by a one-page document entitled "Assignment" that the Debtor says Kattula signed on October 1, 2004. According to the testimony of both Kattula and the Debtor's bookkeeper, Simovski, this "Assignment" document was prepared by Joseph Ostrowski,
Although the Assignment document allegedly was drafted by an attorney, it contains a number of apparent typographical errors, an incomplete sentence, and some odd and ungrammatical wording. The Assignment document states, in its entirety, the following, and contains handwritten signatures on both of the signature lines:
The above Assignment document recites that the Debtor had paid K & B $ 681,000.00, in exchange for the assignment of the K & B assets to the Debtor. Kattula testified about how the Debtor paid that $ 681,000.00 to K & B. He testified that the $ 681,000.00 consists of two parts. The first part is the $ 471,000.00 refund from Prime, out of the October 1, 2004 $ 1.8 million wire transfer to Prime, discussed above, which Kattula says he caused Prime to pay to K & B.
The Court rejects the Debtor's theory, based on the alleged October 1, 2004 Assignment document, that the October 1, 2004 wire transfer payment to Prime was a payment by the Debtor to Prime. Rather, the Court finds that such payment was, in its entirety, a payment by K & B to Prime. No part of the payment can be deemed to have come from, or been made on behalf of, the Debtor. The payment represented payment on a debt that GEM owed to K & B. And the Court finds that when the October 1, 2004 wire transfer was made to Prime, there had not yet been any assignment of any of K & B's assets to the Debtor, under the alleged Assignment document or otherwise. The Court makes these findings for the following reasons.
As mentioned by Prime's counsel during this argument just quoted, the second paragraph of the document contains a sentence that is not a complete sentence, but which refers to the assignment as being "As set forth that certain Purchase, Sale or Operating Agreements." The Court notes that not only is this an ungrammatical and incomplete sentence, but also that during the long evidentiary hearing, the Debtor never produced or offered into evidence any "Purchase, Sale or Operating Agreements" that evidence, mention, or
From the wording of the Assignment document, the Court finds that the document obviously was not drafted by attorney Ostrowski, or by any other attorney. Rather, this document must have been clumsily cobbled together by either Kattula or Simovski, by copying and pasting from other agreements that had been done in the past by Kattula or one or more of Kattula's businesses.
The testimony of Kattula and Simovski that the Assignment document was drafted by attorney Ostrowski is undermined by a further, more subtle, but very telling fact. As noted above, the Assignment document recited that the consideration given by the Debtor in exchange for the assignment of K & B assets was the Debtor's payment of $ 681,000.00. Of this amount, Kattula testified, $ 471,000.00 came from the $ 471,000.00 refund from Prime, out of the October 1, 2004 $ 1.8 million wire transfer to Prime, discussed above, which Kattula says he caused Prime to pay to K & B. But this $ 471,000.00 was the property of K & B to begin with, not the Debtor. It only ever became property of the Debtor, if at all, by virtue of the Assignment document itself. This is so because, as discussed above, the $ 1.8 million wire transfer was made by GEM to Prime in payment of GEM's debt under its promissory note
Thus, the recital of the $ 681,000.00 consideration in the Assignment document makes no sense at all.
• The testimony of Simovski during the evidentiary hearing, that she signed the Assignment document as a witness on October 1, 2004, was impeached by her inconsistent deposition testimony. During the evidentiary hearing, Simovski admitted that she was not yet working for Kattula or the Debtor as of October 1, 2004, but she testified that on that day, she was interviewing for a job with Kattula, when he asked her to witness the signing of the Assignment document. She also testified that she knew that the Assignment document was drafted by the in-house counsel Ostrowski because he also was present when she witnessed Kattula's signature of the document, on October 1, 2004.
• The Debtor's and K & B's in-house attorney Ostrowski, who supposedly drafted the October 1, 2004 Assignment document, filed a lawsuit on behalf of K & B against the City of Cleveland in Ohio
• As Prime points out, K & B was involved in numerous lawsuits after the purported October 1, 2004 assignment of its assets to the Debtor, and in those lawsuits K & B never mentioned the assignment, until at least 2007. Simovski testified that she does not know why this is.
• Simovski and Kattula stated in an e-mail on October 5, 2006 that the purported assignment of assets from K & B to the Debtor occurred
• In an e-mail dated February 25, 2005, which Kattula's attorney Ostrowski sent "at the direction of Bob Kattula," to Dan Sills, Joy Hubb, and Glen O'Connell of Waste Path, Ostrowski stated that K & B "has assigned its financial interest to the Robert T. Kattula Irrevocable Trust on or about 10/2/95. This assignment is subject to the security interests of Prime Financial, and other lending institutions."
• Peter Schneiderman is the attorney for Prime who drafted the loan documents for all of the many loans between Prime, on the one hand, and K & B, Kattula and his various entities on the other hand. Schneiderman credibly testified that he was never told by Kattula or anyone else about any alleged assignment of assets by K & B to the Debtor, and he never saw the alleged October 1, 2004 Assignment document, until the present litigation began in this bankruptcy case — i.e., well after the Debtor filed this bankruptcy case in 2009.
• Similarly, one would expect Kattula to have informed Schneiderman (and Jade) of the alleged October 1, 2004 assignment when Prime, Kattula, K & B, and related entities entered into the so-called "MOU transaction," in November 2005. (This transaction is discussed in detail in Part III.E.2 of this Opinion, below.) But no one told Schneiderman about the alleged assignment
• There is no evidence that corroborates the testimony of Kattula and Simovski that the Assignment document was signed on October 1, 2004, rather than later. The closest the evidence comes to corroborating their story is the testimony of Robert Gigliotti, who is an accountant hired by Kattula in October of 2004 to prepare financial statements and tax returns for the Debtor and K & B, and Kattula.
Gigliotti testified that one of the tasks he was asked to perform was accounting and bookkeeping work to reflect the assignment of assets from K & B to the Debtor. But Gigliotti testified that he did not do this work until May or June 2005.
Gigliotti prepared the 2004 federal income tax return for the Debtor in August 2005; that tax return was completed by Gigliotti on August 17, 2005, and filed with the Internal Revenue Service within a
But it is clear that in doing the work he did for the Debtor in 2005, Gigliotti was woefully uninformed about the Debtor and its history. The 2004 tax return that Gigliotti prepared for the Debtor erroneously stated that it was the Debtor's initial tax return, that the Debtor had started its business on January 1, 2004, and that at the beginning of 2004, the Debtor had no assets, no liabilities, and no capital.
In any event, the most that can be gleaned from this evidence, at best from the Debtor's perspective, is that: (a) the alleged October 1, 2004 Assignment document had been signed by sometime in early to mid-2005; (b) the Debtor's books and records were first modified to reflect an assignment of assets from K & B to the Debtor in May or June 2005; and (c) the Debtor's 2004 federal income tax return, though filled with errors, reflected a transfer of K & B assets to the Debtor as having been done by December 31, 2004. None of this corroborates the testimony of Kattula and Simovski that the Assignment document actually was signed, and that K & B assets were assigned to the Debtor, on October 1, 2004.
From all of the evidence, the Court finds that the Assignment document was actually signed by Kattula and witnessed by Simovski considerably later than October 1, 2004, and probably not until sometime in late February 2005 or later. So when the $ 1.8 million wire transfer payment was made to Prime
On October 1, 2004, the Debtor had no legal authority to enter into the transaction described by the Assignment document. The October 1, 2004 date of the alleged assignment of K & B assets to the Debtor was only two days after the Court entered the September 29, 2004 Order confirming the Debtor's 2004 Plan, in the 2003
The transaction set out in the October 1, 2004 Assignment document, as described above, was the payment by the Debtor of $ 681,000.00 to K & B, in exchange for the assignment by K & B to the Debtor of all or substantially all of K & B's assets. Such a transaction clearly was outside the ordinary course of business for the Debtor. As such, the Debtor could not engage in such a transaction, while still in bankruptcy as it was, without "notice and a hearing," under 11 U.S.C. § 363(b)(1). That section of the Bankruptcy Code states, in pertinent part, and with exceptions not applicable here, that "the trustee [which includes a Chapter 11 debtor in possession, under 11 U.S.C. § 1107(a)], after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate." Under § 363(b)(1), an entity that is a Chapter 11 debtor in possession may not use, sell, or lease any of its property (all of which is property of the bankruptcy estate), other than in the ordinary course of business, without notice and a hearing, or an order of the bankruptcy court.
The Federal Rules of Bankruptcy Procedure and this Court's Local Rules require that a 21-day notice of such a non-ordinary course use, sale, or lease of bankruptcy estate property be served by the debtor in possession on all creditors, and any party in interest may file an objection within 14 days after service of the notice. See Fed. R. Bankr. P. 6004(a), 6004(b), 2002(a)(2), 2002(c)(1); E.D. Mich. LBR 6004-1(a).
For these reasons, as of October 1, 2004, the Debtor was required by Bankruptcy Code § 363(b)(1) to give notice to all creditors, including Prime, of the transaction described in the alleged October 1, 2004 Assignment document, and if anyone timely objected, a hearing would have to be held and an order obtained authorizing the transaction. Because none of this occurred, the Debtor had no legal authority to enter into such a transaction on October 1, 2004.
This is a further, strong reason why the Court finds that the Debtor in fact did
But in any event the legal result,
Id. (citations omitted); see also 3 Collier on Bankruptcy ¶ 363.02[1][b], at 363-14 (Richard Levin & Henry J. Sommer, eds., 16th ed. 2018) (footnote omitted) ("And, depending on the circumstances, a court may invalidate a sale entirely or find the order approving the sale to be ineffective to sell property free and clear of the applicable creditor's interests if the trustee fails to give direct notice to an adverse claimant of whom the trustee had notice.")
• As noted above, the second paragraph of the Assignment document contains a sentence that is not a complete sentence, but which refers to the assignment as being "As set forth that certain Purchase, Sale or Operating Agreements." And as noted above, during the long evidentiary hearing, the Debtor never produced or offered into evidence any "Purchase, Sale or Operating Agreements" that mention or have anything to do with this alleged assignment of assets by K & B to the Debtor. Nor did the Debtor ever assert that there were any such agreements. From this, the Court finds that there are no such "Purchase, Sale or Operating Agreements" that "set forth" the assignment of any assets from K & B to the Debtor. From this, in turn, the Court finds that under the wording of the Assignment document itself, that document actually assigned
• Although the Assignment document purports to be an assignment from K & B to the Debtor, neither K & B nor the Debtor actually signed the document. The only signatory was Kattula, and the Court finds that he signed the document individually, rather than on behalf of either K & B or the Debtor. Nothing in the Assignment document, or at Kattula's signature line, indicated that Kattula was signing the document on behalf of either K & B or the Debtor. So the Assignment document was not effective to assign anything from K & B, which was a limited liability corporation (LLC), separate from Kattula individually. This flaw in the document also is likely due to the fact that no attorney had any role in drafting the document.
This is so because of the third paragraph of the Assignment document. That third paragraph immediately follows the paragraph in which K & B purports to assign to the Debtor K & B's "chooses in actions, lawsuits, collections, judgments and any and all claims (hereinafter `claims')." The third paragraph clearly shows that this assignment was done solely for collection purposes. That is, the assignment merely permitted the Debtor to enforce and collect,
If the intent of the Assignment document was to assign
So the purported assignment in the Assignment document did not transfer ownership of any of K & B's assets to the Debtor. For this additional reason, the October 1, 2004 wire transfer of $ 1.8 million to Prime must be deemed to be a payment by K & B to Prime, and not a payment by or on behalf of the Debtor to Prime.
That assignment was done by a document that was admitted into evidence as CX-68. That document is entitled "Assignment of Promissory Note," and was signed by K & B, by Robert Kattula as its "[a]uthorized [a]gent." (In cross-examination, Kattula admitted that he signed this assignment document.) Attached to this assignment document is the July 2003 promissory note in the amount of $ 1.95 million from GEM to K & B, described above. That note was originally payable by GEM to K & B. The assignment document, dated August 21, 2003, assigned that note to Prime, and said that "THIS NOTE SHALL BE PAYABLE TO THE ORDER OF: PRIME FINANCIAL, INC."
This assignment document assigned all of K & B's rights under the GEM promissory note to Prime, and made Prime the payee under the note, more than a year before K & B purportedly transferred its assets to the Debtor under the October 1, 2004 Assignment document. It is clear from the evidence that this assignment was done in order to secure payment of K & B's debt to Prime under the K & B Cleveland loan.
As noted above, Kattula admitted that he signed the August 21, 2003 assignment document.
Initially during the evidentiary hearing, in an attempt to support the Debtor's claim that the October 1, 2004 Assignment document was signed on October 1, 2004 and that K & B's assets were assigned to the Debtor on that date, the Debtor pointed to the
But as Prime pointed out, (1) the amended returns were not filed until November 2008, more than four years after the purported October 1, 2004 assignment of K & B's assets to the Debtor; and (2) as Simovski admitted, the initial tax returns
In addition to its theory that K & B assigned its assets to the Debtor on October 1, 2004, the Debtor claims that even without the October 1, 2004 assignment, at least $ 900,000.00 of the money wired to Prime on October 1, 2004 must be deemed to be property owned by the Debtor, and therefore must be deemed to be a payment by the Debtor on Prime's $ 1.2 million claim under the 2004 Plan. This is because, according to Kattula's testimony, GEM had leased part of the Debtor's real property in Cleveland, beginning on July 9, 2001, for $ 25,000.00 per month. GEM had not paid any of the required monthly lease payments, and at the time of the July 2003 settlement, owed the Debtor at least $ 900,000.00 in lease payments ($ 25,000.00 per month x 36 months = $ 900,000.00). Payment of this $ 900,000.00, according to Kattula, was part of the $ 1.95 million promissory note that GEM made payable to K & B, as part of the July 2003 settlement. This is so, Kattula says, even though the GEM note was payable only to K & B, not the Debtor, while the $ 900,000.00 in rent allegedly was owed to the Debtor, which owned the real estate and leased the property to GEM.
Prime disputes this theory. And the Court rejects this theory, because it is not proven. The Court finds that Kattula's testimony in support of this theory is not credible, and there is no other supporting evidence. Rather, this theory is contradicted by all of the persuasive evidence — i.e., all of the evidence other than the testimony of Kattula and Simovski.
The Debtor did not present any written evidence of any lease between GEM and the Debtor, under which GEM was to
In addition, the July 30, 2003 settlement agreement (PX-3), under which GEM obligated itself to make the $ 1.9 million promissory note payable to K & B, and which was the basis for GEM's October 1, 2004, $ 1.8 million wire transfer to Prime, does not mention or support the Debtor's claim that it included anything for any lease claims the Debtor had against GEM. There is no indication whatsoever in this settlement agreement that any part of GEM's $ 1.9 million note, payable to K & B, included payment of any lease claim owing to the Debtor, in any amount, let alone an amount as large as $ 900,000.
Finally, other substantial evidence refutes the Debtor's claim about the $ 900,000 rent claim:
For all of the above reasons, the Court finds and concludes that all of the $ 1.8 million wire transfer that occurred on October 1, 2004 must be deemed to be payment by K & B of its debts to Prime, and not any payment by or on behalf of the Debtor of Prime's $ 1.2 million allowed claim under the 2004 Plan.
The second wire transfer by which the Debtor allegedly paid Prime's $ 1.2 million claim under the 2004 Plan occurred on October 4, 2004. On that day, the Debtor's bankruptcy counsel in the 2003 Case, Schafer and Weiner, PLC, wired $ 468,660.09 to Prime.
According to Kattula, he had promised Prime's President, Jade, that when the Debtor received the $ 500,000.00 in proceeds from the sale of the Transport Property, the Debtor would pay that to Prime.
The Debtor's contention that this wire transfer should be viewed as a payment from the Debtor to Prime is further supported by the fact that Debtor's bankruptcy counsel at Schafer and Weiner (specifically, the late Arnold Schafer), instructed that firm's Kimberly Peickert to write "re: TAJ Graphics" in the "Special Instructions" box on the Comerica Bank wire transfer request form, and Peickert did so, after which Mr. Schafer signed it.
Prime contends, based on the testimony of Jade and his interpretation of the 2004 Plan, that the $ 468,660.09 wire transfer was not proceeds of a sale of the Debtor's real estate, because the real estate in question belonged to K & B at the time of the sale. K & B owned that property, Jade says, because K & B had purchased the property at an auction held shortly before confirmation of the 2004 Plan.
But Jade and Prime are wrong about this. Rather, the Court finds that the real estate in question, known as the Transport Property, still belonged to the Debtor when it was sold, not to K & B. Rather than purchasing this property, as the only bidder at the sale auction described in the 2004 Plan, K & B ultimately elected to
Prime did not keep the entire amount of the October 4, 2004 wire transfer. Rather, at Kattula's request, Prime retained only $ 189,315.28 of the $ 468,660.09 wire transfer amount, and the next day wired the remaining balance of $ 279,344.81 to K & B. At Kattula's request, the $ 189,315.28 amount that Prime retained from the October 4, 2004 wire transfer was applied as payment on a loan known as the K & C Group Loan, to pay interest then owing and to pay down the principal owing on that loan to $ 200,000.00.
The K & C Group Loan was a loan of $ 425,000 made by Prime to K & C Group, LLC in November 2003. That Kentucky LLC had been formed in July 2003, and its members were Maria Kattula (Robert Kattula's wife) and Stefanie Crowell. The K & C Group Loan was personally guaranteed by K & B, Robert Kattula, Maria Kattula, Stefanie Crowell, and Jaime Crowell. The K & C Group Loan eventually was paid off, in April 2005.
At this point, the Court notes some further facts about the two wire transfers to Prime that occurred on October 1, 2004 and October 4, 2004, within days after the Debtor's 2004 Plan was confirmed on September 29, 2004, and which the Debtor contends were payments of the Debtor's money and which must be considered payments entirely from the Debtor to Prime. These two wire transfers resulted in Prime receiving and retaining substantially more than the $ 1.2 million that the 2004 Plan required the Debtor to pay to Prime. The $ 1,235,491.12 that Prime retained as the payoff of the K & B Cleveland loan from the October 1, 2004 wire transfer, plus the $ 468,660.09 Prime received in the October 4, 2004 wire transfer, total $ 1,704.151.21. When one subtracts from this total the $ 279,344.81 that Prime did not retain from the October 4, 2004 wire transfer (but instead wired to K & B on October 5, 2004), it still leaves a total of $ 1,424,806.40 that the Debtor says it paid to Prime in the two October 2004 wire transfers. This was $ 224,806.40 more than the $ 1.2 million the Debtor was obligated to pay Prime under the 2004 Plan. And when these payments were made, no interest had yet accrued on Prime's $ 1.2 million claim under the 2004 Plan. This is because under the 2004 Plan, interest did not begin to accrue until the Plan's "Effective Date," which was October 12, 2004. See discussion in Part III.B of this Opinion.
When asked why the Debtor had paid so much more to Prime than it was obligated
For the reasons stated in detail in Part III.D.1 of this Opinion, the Court has found that no part of the October 1, 2004 wire transfer can be deemed a payment by or on behalf of the Debtor to Prime. But the Court agrees with the Debtor that all of the October 4, 2004 wire transfer to Prime, in the amount of $ 468,660.09, must be deemed a payment by the Debtor to Prime. Because this payment was from proceeds of the $ 500,000 sale of the Debtor's real estate (the Transport Property) to GEM, the proceeds must be considered to have been the Debtor's property, and the payment must be considered to have been made by the Debtor.
Moreover, the amount that the Debtor must be deemed to have paid to Prime is the full amount of the $ 468,660.09 wire transfer that Prime received on October 4, 2004. This is so even though Prime did not keep the entire amount of the October 4, 2004 wire transfer. As discussed above, the next day, Prime wired $ 279,344.81 of this money to K & B, at Kattula's request. This amount was wired to the bank account of K & B,
So Prime's allowed claim in this case must be reduced by $ 468,660.09, plus interest. The effect of this is that Prime's $ 1.2 million allowed claim from the 2003 Case is reduced to $ 731,339.91, and Prime is only entitled to interest on that amount, not on the full $ 1.2 million amount. As discussed above, under the confirmed 2004
Because of the Debtor's October 4, 2004 partial payment on Prime's allowed claim, interest accrued only on the reduced claim amount of $ 731,339.91. At 17% per annum, beginning on October 12, 2004 and accruing until the October 21, 2009 petition date of the Debtor's current bankruptcy case, the interest on Prime's reduced claim of $ 731,339.91 is $ 624,704.54. Prime's total allowed claim in this case, therefore, is $ 1,356,044.45. This is subject to further reduction, if and to the extent the Debtor has met its burden of showing that any other payments were made on the Debtor's debt to Prime.
The Debtor offered additional evidence in support of its allegation that the October 2004 wire transfers to Prime paid the Debtor's claim in full.
Kattula testified that Prime's President Jade specifically told Kattula "that the plan obligation of [the Debtor] was paid," and that in early October 2004 Jade "several times" acknowledged that the Debtor's 2004 Plan obligation to Prime was satisfied.
The Court does not find this testimony by Kattula to be credible — the Court simply does not believe Kattula's testimony. And this testimony is at odds with the substantial evidence, discussed in this Opinion, which the Court does find to be credible and persuasive, showing that the Debtor's 2004 Plan obligation to Prime was not satisfied in October 2004.
The Debtor's Simovski testified that her main contact at Prime, a Prime employee named Jan,
Simovski further testified that in August or September 2006, she and Kattula met with Prime's Jade at his office, and that during that meeting Jade acknowledged that the Debtor TAJ's debt under the 2004 Plan had been paid off:
Simovski also testified that when she met with Jade in 2006, "he asked me why are you bringing up TAJ? TAJ is done."
The Court does not find any of the foregoing testimony by Simovski to be persuasive. The Court has already found Simovski to be a less than credible witness, and this testimony is not credible.
It is also possible that, at least in part, the foregoing testimony by Simovski may reflect a misunderstanding on her part of what she was told in her conversations with Jade and Prime's internal bookkeeper, Jan Hubler.
Jade credibly testified about meeting at his office with Kattula and Simovski in the
At that time, Jade did have reason to think that the Debtor had dissolved. The Debtor's 2004 Plan, which was confirmed on September 29, 2004, called for a sale of all the Debtor's assets — a liquidation — following which the Debtor was to be dissolved.
When Jade was asked about the Debtor in his meeting with Kattula and Simovski, it was his first inkling that the Debtor had not dissolved. Because of that, Jade caused his attorney to "cc" the Debtor in a notice of default letter dated December 14, 2006, sent to Kattula, K & B, and other Kattula-related entities, regarding defaults under several loans then owing to Prime, including the Luna Pier loan.
In any event, the Court does not find that Jade or anyone else from or on behalf of Prime ever told Kattula or Simovski that the Debtor's debt to Prime under the 2004 Plan had been paid in full.
The Debtor also cites as supporting evidence a letter from Prime to Kattula, signed by Jade, and dated June 6, 2006. The letter stated that "[a]t your request we are providing you with the following information that you requested, related to your notes due to Prime Financial for the year 2005." The letter then listed seven notes, including the "K & B Cleveland" note which it said was "paid off in 2004." The letter did not list or mention any note or debt owing from the Debtor to Prime.
The Court does not view this evidence as tending to show that the Debtor owed no debt to Prime, either as of the date of the June 6, 2006 letter or as of the end of 2005. It is not surprising that in listing the "notes due to Prime," Jade's letter did not
As further evidence that the Debtor's debt to Prime under the 2004 Plan was paid off, the Debtor cites the fact that, even though Prime now claims that it was never paid anything on its allowed claim against the Debtor under the 2004 Plan, Prime never made any effort in the Debtor's 2003 bankruptcy case to seek relief for such a payment default under the confirmed 2004 Plan.
The Court does not find this argument by the Debtor persuasive. First, as it turns out, there was in fact no payment default by the Debtor under the 2004 Plan. The Debtor's payment to Prime under the Plan, in the form of the $ 468,660.09 wire transfer made on October 4, 2004 discussed above, amounted to a permitted early payment by the Debtor to Prime under the 2004 Plan, and had the effect of putting the Debtor way ahead of the payment schedule it was required to meet under the Plan. As described in detail in Part III.B of this Opinion, the 2004 Plan required the Debtor to make payments to Prime at the rate of approximately $ 18,000 per month, beginning April 13, 2005, followed by a balloon payment no later than October 12, 2009, in the amount of roughly $ 1.081 million. The October 4, 2004 wire transfer therefore represented a pre-payment by the Debtor to Prime of more than 26 months of installments due under the 2004 Plan, which meant that the Debtor paid its monthly 2004 Plan payments to Prime covering the months through May 2007.
Second, as discussed above, until at least sometime in the third quarter of 2006, Prime's President Jade thought, based on the 2004 Plan, that the Debtor had liquidated its assets, primarily in the form of the Debtor's real estate, and had been dissolved. Only at that point did he have an inkling that perhaps the Debtor had not been dissolved. And until the end of 2007 or early 2008, Jade knew nothing of the alleged transfer of K & B assets to the Debtor that the Debtor now says occurred on October 1, 2004, but which the Debtor had not disclosed in any way to Prime. And even when Jade first learned of the alleged transfer of K & B assets to the Debtor, he did not believe that the transfer had really occurred.
So it is not surprising that Prime did not take action in the Debtor's 2003 case to enforce the Debtor's payment obligations under the 2004 Plan, before the Debtor filed the current Chapter 11 bankruptcy case on October 21, 2009. Prime's failure to take such action does not raise any inference
The Debtor alleges that even if Prime's $ 1.2 million allowed claim under the 2004 Plan was not paid in full by the wire transfers in October 2004, the claim was paid in full by one or more later events. The Court will discuss those theories next.
The Debtor alleges that the Luna Pier loan was paid in full by events that occurred after October 2004. The Debtor alleges several such events, and relies first on the theory that the Luna Pier loan was paid in full by the foreclosure sale of the Luna Pier property (i.e., the real estate located at 3949 Luna Pier, Erie, Michigan 48133)
Before discussing why the Debtor alleges that the Luna Pier loan was paid off, it is necessary to discuss why the Debtor contends that such alleged payoff is relevant here — that is, why the Debtor says it shows that the Debtor's debt to Prime under the 2004 Plan was paid.
As described in Part III.D of this Opinion, the Debtor's debt to Prime originally consisted only of the Debtor's guarantee of repayment by K & B of two loans K & B had obtained from Prime — the K & B Cleveland loan and the Luna Pier loan. Prime's $ 1.2 million allowed claim in the 2003 Case was based on these two loan guaranties, and nothing else. As described in Part III.D.1 of this Opinion, it is undisputed that the K & B Cleveland loan was paid in full by the GEM wire transfer to Prime on October 1, 2004. The Debtor argues that
Prime's response to these arguments is multi-layered. First and foremost, Prime says that the Luna Pier loan was never paid in full, and that a substantial balance is still owing by K & B on that loan. Second, Prime agrees that the Debtor's debt to Prime consisted only of guaranties of loans owing to Prime by other Kattula-related parties, rather than direct, primary liability on any loans.
As the Court will discuss, this limited concession is one that Prime did not have to make under applicable law. But it is a concession that is premised on the Debtor having guaranteed all of the loans that Prime made to K & B, Kattula, and other Kattula-related entities, not just the K & B Cleveland loan and the Luna Pier loan. Prime has not actually conceded the Debtor's rather different argument. The Debtor's argument is that if the Court finds that the Debtor guaranteed only the two loans (the K & B Cleveland loan and the Luna Pier loan), then if those two loans in fact were paid off, the Debtor's debt to Prime under the 2004 Plan must be deemed fully paid.
The Court resolves these issues as follows.
Prime has argued that the Debtor guaranteed other loans, but the Debtor disputes that. Specifically, Prime argues, based on Jade's testimony and certain exhibits, that the Debtor guaranteed the following other loans made by Prime, which remain unpaid. (This list excludes loans that Prime admits have been paid off): Waste Path II loan; and K & B Plus loan.
The K & B Plus loan was a loan in the amount of $ 415,000 made by Prime to K & B on March 23, 2004. That loan was guaranteed by Kattula and his wife Maria Kattula and two Maria Kattula trusts
The evidence in the record shows that before filing its 2003 bankruptcy case, the Debtor signed two Guaranty Agreements (the "Pre-Petition Guaranties"). In the first of these, dated December 13, 2001, the Debtor guaranteed payment of a $ 525,000 loan by Prime to K & B, which loan later became part of the K & B Cleveland loan.
In addition to the two Pre-Petition Guaranties, which the Debtor signed before filing its 2003 bankruptcy case, the Debtor signed a document entitled "Reaffirmation of Guaranty Agreement" dated March 23, 2004 (the "Post-Petition Guaranty Reaffirmation").
Prime argues that the Debtor also guaranteed the debts of the other Kattula-related entities, in three other documents that were signed after the Debtor filed its 2003 bankruptcy case. These were (1) a document entitled "Cross Collateralization/Cross Default Agreement" dated October 10, 2004;
But none of the language of any of these three documents imposes any liability on the Debtor, by any guaranty or otherwise. And even if there was such language in any of these documents, it would not be binding on the Debtor, because these documents were not signed by the Debtor.
Under the wording of the Pre-Petition Guaranties and the Post-Petition Guaranty Reaffirmation, discussed above, the Debtor guaranteed not only existing debts of K & B to Prime, but also all future debts of K & B to Prime. But the Debtor's guaranties to Prime all predated confirmation of the Debtor's 2004 Plan in the 2003 bankruptcy case. (That Plan was confirmed on September 29, 2004). All of these guaranties — the two Pre-Petition Guaranties and the Post-Petition Guaranty Reaffirmation that merely "reaffirmed" one of the Pre-Petition Guaranties — were the basis for Prime's claim against the Debtor in the 2003 bankruptcy case.
Confirmation of the 2004 Plan gave Prime an allowed $ 1.2 million claim against the Debtor, and a fixed right to payment of that claim, with interest, amount according to the schedule set forth in the 2004 Plan. The Debtor's debt to Prime no longer was in the nature of a guaranty. Prime's liquidated, non-contingent $ 1.2 million claim under the 2004 Plan was substituted for the previous contingent, unliquidated claim Prime had based on the Debtor's guaranties of the K & B debt. As a result of that substitution, it no longer mattered whether or when K & B defaulted on any of its loans from Prime, or how much K & B continued to owe Prime on those loans. The Debtor's debt to Prime was fixed and no longer contingent in any way on such things.
This conclusion is compelled by both case law and the terms of the 2004 Plan. In sections that apply to Prime, among other creditors, the confirmed 2004 Plan stated, in pertinent part, the following:
Case law, including cases discussing the res judicata effect of a confirmed Chapter 11 plan, confirms this effect of the 2004 Plan on Prime's claim against the Debtor:
Nat'l City Bank v. Troutman Enters., Inc. (In re Troutman Enters., Inc.), 253 B.R. 8, 11 (6th Cir. BAP 2000) (emphasis added); see also In re Nylon Net Co., 225 B.R. 404, 406 (Bankr. W.D. Tenn. 1998) (citations omitted) (emphasis added) ("It is well settled that ... confirmation of a plan of reorganization ...
This substitution-of-claim effect of the 2004 Plan also follows from the fact that once the 2004 Plan was confirmed on September 29, 2004, both the Debtor and Prime were bound by the confirmed 2004 Plan, under 11 U.S.C. § 1141(a), and under case law giving the confirmation order res judicata effect. See, e.g., Browning v. Levy, 283 F.3d 761, 772 (6th Cir. 2002).
It follows from all of this that Prime's claim under the 2004 Plan cannot be deemed paid or reduced by any later payments made to Prime by or on behalf of any party other than the Debtor, or by the reduction of other Kattula-related debts owing to Prime, including any payment on or other reduction of the Luna Pier loan that the Debtor originally guaranteed. For this reason, it does not matter whether or to what extent the Luna Pier loan was paid down or paid off, after confirmation of the Debtor's 2004 Plan. It is undisputed that the Debtor itself made no payments to Prime on the Luna Pier loan. So with respect to Prime's claim against the Debtor, based on the 2004 Plan, the Debtor is entitled to no credit for any such payments or credits that were made or due to be given on the Luna Pier loan.
The Debtor alleges that the Luna Pier loan was paid off, or must be deemed paid off. Prime disputes that. But for the reasons discussed above, the Court has concluded that this dispute about the Luna
But in any event, the Court also rejects the Debtor's allegation that the Luna Pier loan was paid off. Rather, as explained below, the Court finds that while payments were made on the Luna Pier loan after confirmation of the Debtor's 2004 Plan (though not by the Debtor), the Luna Pier loan was never paid off, and in fact, the balance owing to Prime on that loan never fell below $ 987,000. And the balance owing to Prime on the Luna Pier loan as of the October 21, 2009 date on which the Debtor filed the current bankruptcy case, including interest, was over $ 1.3 million.
After K & B defaulted on the Luna Pier loan, Prime foreclosed on its mortgage securing that loan, against the Luna Pier real estate. This was a foreclosure by advertisement, as permitted and governed by Michigan law. See Mich. Comp. Laws Ann. § 600.3201, et seq. The sheriff's foreclosure sale took place on December 13, 2007. Prime was the successful bidder at the foreclosure sale, and the purchase price was $ 325,000.00. K & B did not redeem the Luna Pier property within the applicable one-year statutory redemption period, as permitted by Mich. Comp. Laws Ann. § 600.3240.
The Court finds that at the end of December 2007, K & B owed Prime a balance of $ 1,312,061.73 on the Luna Pier loan, without yet crediting the $ 325,000.00 credit bid that Prime made at the December 13, 2007 foreclosure sale. After that credit is applied, the Luna Pier loan balance became $ 987,061.73, as of the end of 2007. This balance reflects credits given in 2006 and 2007 to reduce the Luna Pier loan balance, under the agreement known as the MOU, which is discussed later in this Opinion. Those credits totaled $ 302,744.00 in 2006 and $ 97,410.71 in 2007, for a total of $ 400,154.71 in such credits.
So, the Court finds that the balance owing to Prime on the Luna Pier loan was $ 987,061.73 as of the end of 2007. After that time, interest continued to accrue on the Luna Pier loan balance, at the contractual default rate of 19% per annum,
In calculating the balance owing on the Luna Pier loan above, the Court is rejecting the following argument made by the Debtor. The Debtor argues that the Luna Pier loan must be deemed paid in full, or nearly so, based on Mich. Comp. Laws Ann. § 600.3280. The Debtor argues that the Luna Pier property was worth substantially more than the $ 325,000 that Prime purchased the property for in the 2007 foreclosure sale. The Debtor asserts that the Luna Pier property was worth at least $ 1 million,
The Debtor's argument is based on Mich. Comp. Laws Ann. § 600.3280, which states, in pertinent part:
(emphasis added). The effect of this statute is that "[u]nder Michigan law, when a creditor forecloses by advertisement, the borrower's debt is reduced to the extent of the `true value' of the property, even if the actual foreclosure sale price was lower than that." DAGS II, LLC v. Huntington Nat'l Bank, 865 F.3d 384, 387-88 (6th Cir. 2017).
As discussed in Part III.C.2 of this Opinion, in this case the Debtor bears the burden of proving its objection to Prime's claim, by a preponderance of the evidence. This is so because in this context, the burden of proof is what it would be outside of bankruptcy, under applicable nonbankruptcy law. As explained earlier, the Claim Objection is in the nature of a defense of payment, and such a defense is an affirmative defense under applicable Michigan law, on which the party asserting the defense bears the burden of proof.
The Debtor has not met its burden of proving, by a preponderance of the evidence, that on the day of the December 13, 2007 foreclosure sale, the Luna Pier property had a value greater than the $ 325,000.00 foreclosure sale price.
The evidence regarding the value of the Luna Pier property includes the following.
There was evidence of two appraisals that were done on the Luna Pier property, well before the date of the December 13, 2007 foreclosure sale. One was done in 2002 and one was done in early 2006. No appraiser testified, but excerpts from two written appraisal reports were admitted into evidence. The first such report was dated August 6, 2002 and was done by Joseph M. Leutze, and was performed at the request of Prime and Comerica Bank.
The second appraisal was dated February 16, 2006, and was done by Joe Anderson and Kent M. Krause of Petroval. It was performed for BLX Capital, LLC, not for Prime.
Kattula testified, vaguely, that "there is a formal appraisal done by a company in Colorado under direction of the bank of $ 5.5 million "after we open the truck stop."
This testimony by Kattula is too vague to have any probative value. Kattula's testimony about the alleged $ 5.5 million appraisal was very vague and incomplete. Kattula did not present any documentation about this alleged appraisal. And it was by an unnamed appraiser, with no stated date, no information about how this appraiser came to this opinion of value, and with no further details, except that it obviously was an appraisal of the projected
As to Kattula's testimony about the alleged offer from "Jim" to purchase the vacant land, no written offer or written evidence of such an offer was ever offered as an exhibit. And Kattula's testimony about this alleged offer is lacking crucial details, including the date of the offer, the precise amount of the offer, and the conditions and contingencies in the offer.
There was some additional evidence presented about this person named Jim, who allegedly was willing to buy the Luna Pier property. Steven Cohen sent an e-mail to Jade on August 30, 2006, which stated that "Jim" would be willing to pay $ 1.5 million for the Luna Pier property. This willingness by "Jim" was subject to numerous conditions. Cohen's e-mail stated:
Jade testified that he let Kattula know about this. Then a purchase offer of some kind was received, for $ 1.3 million. (That purchase offer is not in evidence; it was never offered as an exhibit). Jade testified that "when we received the actual purchase offer, I showed it to [Kattula] and it was for [$ 1.3 million] and [Kattula] thought it was too low and rejected it out of hand."
Jade testified that after K & B purchased the Luna Pier property in 2002, it had done virtually nothing to construct a truck stop at the site. "Other than taking the storage tanks out and leaving ... a mess," Kattula and K & B had done nothing to improve the site and had constructed nothing.
Jade further testified that after the February 2006 appraisal, in mid- to late-2007, the United States economy worsened significantly, and specifically, "[h]ousing values plummeted. And commercial properties and especially vacant land plummeted as well, maybe even more so."
Jade testified that he calculated the $ 325,000 amount of the bid that Prime
Jade's testimony strongly indicates that the market value of the Luna Pier property had "plummeted" starting in mid-2007, due to worsened economic conditions. He further testified that the date of the February 2006 appraisal was at "the height of the economic cycle" whereas the October 2007 appraisal was "probably getting close to the lull of the economic cycle."
Jade's testimony also explains why the $ 1.3 million purchase offer from "Jim," dating from late August 2006, is not a reliable indicator of the value of the Luna Pier property at the time of the December 13, 2007 foreclosure sale.
None of this testimony by Jade was contradicted by any evidence presented by the Debtor.
The Debtor argues that its debt to Prime must be deemed to have been paid
The MOU was one of many related restructuring agreements made by Prime and related entities on the one hand, and Kattula and Kattula-related entities on the other hand. Most of these agreements were signed on November 16, 2005, and became effective on December 1, 2005.
Among other things, the MOU transaction restructured three loans that Prime had made to Kattula and Kattula-related entities, including K & B, Kattula, and a Kentucky entity named Waste Path Sanitary Landfill, LLC ("Waste Path"), which conducted a landfill operation in Kentucky. These loans were known as Waste Path I, Waste Path II, and Waste Path III. (The latter two loans are discussed earlier in this Opinion.) Some of the parts of the MOU transaction were: (1) a change in ownership of the membership interests in Waste Path, so that the membership became owned 90% by Calvert Properties, LLC (which was 100% owned by Jade, the 100% owner of Prime) and 10% each by Dan Sills and Joy Hubb; (2) a transfer of roughly 600 acres of land surrounding the Kentucky landfill, from U.S. Environmental Management, LLC to Prime Calvert, LLC (which was 100% owned by Prime); (3) a transfer of equipment used to operate the landfill, to Calvert Machinery, LLC (which was owned 100% by Prime); (4) an assumption by the foregoing three Prime-related entities (Calvert Properties, LLC; Prime Calvert, LLC; and Calvert Machinery, LLC) of $ 1.77 million of the debt owed by Kattula, K & B, and Waste Path to Prime, on the Waste Path I, Waste Path II, and Waste Path III loans. This assumption of debt reduced the total debt owed by Kattula, K & B, and Waste Path to Prime on these three loans by $ 1.77 million.
Of the many documents executed as part of the MOU transaction (copies of which are contained in PX-84), the MOU itself was an agreement signed only by Kattula personally, on the one hand, and Jade, on behalf of Calvert Properties, LLC. The MOU is quoted below. But most relevant here is that the MOU contained provisions for how the revenue from the operation of Waste Path would be spent in the future.
The MOU contained five prioritized tiers for the allocation of Waste Path's annual revenue. Two of those tiers are the subject of the dispute discussed in this Opinion below. The
The MOU is quoted below, in its entirety.
Kattula made the handwritten notations on the MOU, before the parties signed it, that
There is nothing in the MOU or any of the MOU transaction documents saying or suggesting that the Luna Pier loan was paid off, paid down, or discharged in whole or in part, by the MOU transaction.
The Debtor argues, however, that under the five-tiers in Section I of the MOU and a proper accounting of Waste Path's revenue and expenditures for the years 2006 through 2012, more than enough money should have been credited to pay off not only the Luna Pier loan, but also the other loan debts that were owed to Prime by Kattula and the Kattula-related entities.
For these years (through 2012), Prime presented substantial, credible testimony that the revenue of Waste Path was never sufficient to pay anything beyond Tier 3 of the MOU, let alone Tier 5. And as to Tier 3, the only payments that could be made on the Luna Pier loan were made, and were credited against the Luna Pier loan, in 2006 and 2007. As stated in Part III. E.1.b.i of this Opinion, those credits totaled $ 302,744.00 in 2006 and $ 97,410.71 in 2007, for a total of $ 400,154.71 in such credits. Prime's evidence supporting these points, all of which the Court finds to be credible and persuasive, includes the testimony of Dan Sills, who is the managing member and controller of Waste Path;
In further support of its theory that all the loans owing to Prime have been paid in full, the Debtor presented testimony and a report from its retained accounting expert, Seymour Adler.
Prime presented a comprehensive rebuttal to the Debtor's expert, in the form of the testimony and report from Prime's retained accounting expert, Gerald Gabriel.
In Exhibit 238, Gabriel also concluded that the balance owing on the loans other than the Luna Pier loan as of October 31, 2012 was $ 509,549.05.
With one possible, minor exception, the Court agrees with these conclusions by Gabriel. The one possible exception concerns the balance owing on the Luna Pier loan as of the October 1, 2009 petition date. The Court has found, in Part III. E.1.b.i of this Opinion, that the debt owing on the Luna Pier loan as of the petition date in this case was $ 1,325,664.47, plus possible real estate tax reimbursements and legal fees that Prime claims are owing on this loan. And this difference from Gabriel's number as of the petition date would also affect the balance of the Luna Pier that was still owing as of October 31, 2012. (But in any event, there is no evidence that there were any payments or credits due or made on the Luna Pier loan after the petition date in this case).
The opinions by the Debtor's expert, Adler, were based on numerous underpinnings. Without discussing each and every one of these underpinnings in this Opinion, the Court finds that all of these underpinnings were persuasively rebutted by the testimony and report from Prime's expert, Gabriel.
In support of its assertion that the Luna Pier loan was paid off, the Debtor relies on
The BLX Letter stated:
In the context in which the first sentence appears in this letter, it clearly is a written statement by Prime that the Luna Pier loan had been paid off, by payments from K & B and the Debtor.
But Prime very much disputes that the Luna Pier loan was ever in fact paid off, as discussed above. The Court finds that the BLX Letter was false when Jade signed it and Kattula sent it to Business Loan Express, because the Luna Pier loan was not in fact paid off at that time (or ever), and that both Jade and Kattula knew that.
Both before and after the date of the November 15, 2005 BLX Letter, Kattula himself acknowledged and admitted, several times and in a number of ways, that the Luna Pier loan was not paid off. For example, on May 10, 2005, Kattula signed an agreement with Prime entitled "Agreement to Extend Promissory Notes," in which Kattula, K & B, and other Kattula-related entities agreed with Prime to extend
Several times, on dates well after the November 15, 2005 BLX Letter, Prime's attorneys sent Kattula a notice of default regarding the Luna Pier loan, clearly indicating that the loan was still due and that K & B and Kattula were in default on that loan. These included a notice of default on April 1, 2006 (stating that the balance owing on the loan was $ 1,503,425,04);
One very telling fact is that the BLX letter was written and sent to BLX on the day before Kattula and Jade signed the MOU on November 16, 2005. As noted above, on that day, it was Kattula who made the handwritten notations on the MOU, before the parties signed it, that included the Luna Pier loan in Sections I.1.C and II.C of the MOU. As discussed above, these notations made by Kattula in the MOU meant that Tier 3 distributions under the MOU would include any payments necessary to bring current the Luna Pier loan. These notations in the MOU would have been totally unnecessary, and would have made no sense, if the Luna Pier loan had been paid off on or before the day before the MOU was signed.
Kattula admitted in his testimony that as of October 31, 2005, the Luna Pier loan was not paid off.
Finally, several other documents in evidence show implicit, but clear, admissions made by Kattula, well after the date of the November 15, 2005 BLX Letter, and after the date of the November 16, 2005 MOU transaction, that the Luna Pier loan was not paid off.
As stated above, the statement in the BLX Letter indicating that the Luna Pier loan had been paid off was not true, and Kattula and Jade both knew that at the time of the letter. But the letter cannot form any basis for this Court to impose any sort of estoppel against Prime, to preclude Prime from denying that the Luna Pier loan was paid off. Nor does the Debtor argue for any such estoppel. The BLX Letter could not be the basis of any estoppel in favor of the Debtor, Kattula, or K & B, because Kattula knew that the Luna Pier loan was not paid off when he induced Jade to sign the letter. So the Debtor, Kattula, and K & B did not actually rely, and could not be deemed to have justifiably relied, in any way, on the indication in the BLX Letter that the Luna Pier loan was paid off. So the Debtor, Kattula, and K & B could not succeed on any sort of estoppel-type argument. See Van v. Zahorik, 460 Mich. 320,597 N.W.2d 15, 22 (1999).
And for that matter, the recipient of the BLX Letter, Business Loan Express, never actually relied on that letter in any way to its detriment. It is undisputed that Business Loan Express never actually made any loan to Kattula or K & B. So no estoppel could lie in favor of Business Loan Express and against Prime either.
The Debtor argues, as a defense to Prime's claim, that the Debtor is entitled to payment of the amount of certain funds that Waste Path has on deposit with the State of Kentucky, which the Court will refer to as the "Kentucky closure fund" or the "closure fund." But the Court rejects the Debtor's argument about the closure fund, for the reasons stated below.
The Debtor's defense relating to the Kentucky closure fund is based on an agreement that was signed on September 9, 2004, entitled "Purchase Agreement for Membership Rights of Waste Path Sanitary Landfill, LLC" (the "September 9, 2004 Agreement").
The September 9, 2004 Agreement contained two provisions regarding payment of the $ 3 million purchase price to be paid to K & B, and was supplemented by a promissory note. First, the agreement provided that Sills and Hubb were to pay $ 2 million to K & B no later than December 31, 2004.
As part of the September 9, 2004 transaction, the seller of the Waste Path membership shares, K & B, made a loan to Sills, Hubb, and Waste Path, to finance the $ 3 million purchase price. And Sills and Hubb caused Waste Path to give a $ 3 million promissory note, payable to K & B, for the $ 3 million purchase price of the Waste Path membership shares (the "September 9, 2004 Promissory Note").
But there were major problems with the September 9, 2004 transaction. When Sills and Hubb purchased the membership shares of Waste Path from K & B on September 9, 2004, they did not know that those shares were encumbered. The shares had already been pledged by Kattula to Prime, as part of the collateral securing the Waste Path I loan. That was a $ 600,000 loan that Prime made in May 2004 to Kattula, K & B, Waste Path, and other Kattula-related parties.
A further problem is that Kattula did not tell anyone at Prime about the September 9, 2004 sale of the Waste Path membership shares to Sills and Hubb. (Jade and Prime did not learn of this until October 26, 2005, more than a year later.)
The Debtor claims that there was a breach of the September 9, 2004 Agreement's requirement that Sills and Hubb "substitute" the Kentucky closure fund, and pay the amount of that fund to K & B by December 31, 2004. It is undisputed that this "substitution" and payment never occurred. The Debtor asserts that it is the owner of the resulting breach of contract claim, because K & B assigned that claim to the Debtor.
There are at least two fatal flaws in the Debtor's argument about the Kentucky closure fund. First, there is, and never was, any obligation on the part of Prime to "substitute" and pay the closure fund to K & B (or to the Debtor, as K & B's purported successor-in-interest). Under the September 9, 2004 Agreement, which Prime did not even learn about until October 2005, the only parties who were obligated to "substitute" and pay the closure fund amount were Dan Sills and Joy Hubb. The Debtor has not proven any valid legal theory by which Prime could be found liable on this obligation.
Second, this obligation of Sills and Hubb under the September 9, 2004 Agreement was cancelled, as part of the MOU transaction that was done in November 2005. The obligation to "substitute" and pay to K & B the amount of the closure fund was part of the obligation of Sills and Hubb to pay the $ 3 million purchase price for their Waste Path membership shares. That entire payment obligation was cancelled as part of the MOU transaction. In the MOU transaction, Sills and Hubb were each given a 5% membership interest in Waste Path, and the other 90% membership interest was given to Calvert Properties, LLC (which is 100% owned by Jade, the 100% owner of Prime). And the obligation of Sills and Hubb (and Waste Path) to pay the $ 3 million to K & B was cancelled.
Other than the inapplicable, and cancelled, obligation under the September 9, 2004 Agreement, there is no colorable basis for the Debtor's defense relating to the Kentucky closure fund. There is nothing in the MOU or any of the MOU transaction documents saying or suggesting that the Luna Pier loan was to be paid paid off, paid down, or discharged in whole or in part, by the closure fund.
Except with respect to the amount paid to Prime in the October 4, 2004 wire transfer, discussed in Part III.D.2 of this Opinion, the Debtor has failed to prove, under any theory or allegation made at any time during the very long evidentiary hearing held in this case, that the Debtor's debt to Prime under the confirmed 2004 Plan has been paid, or should be deemed to have been paid, in any amount.
For the reasons stated in this Opinion, the Court will enter an order sustaining the Debtor's Claim Objection in part, and overruling it in part, and ordering that Prime has an allowed, non-priority, unsecured claim in this bankruptcy case in the reduced amount of $ 1,356,044.45.
2004 Plan at 12, § 1.5.
The Luna Pier loan was evidenced by, among other documents, a $ 1.25 million note entitled "Promissory Note," dated September 30, 2002, signed by Kattula both individually and on behalf of K & B. (PX-9; Schneiderman (Tr. at Docket # 387) at 11, 13). The Luna Pier loan was secured by a mortgage in the Luna Pier real estate owned by K & B, and by a security interest given by K & B's personal property. (Schneiderman (Tr. At Docket # 387) at 13; PX-10, PX-11). The Debtor guaranteed K & B's payment of the Luna Pier loan under, among other documents, the August 19, 2003 Guaranty Agreement referred to above (PX-13).
The GEM $ 1.95 million promissory note was part of the collateral given by K & B in August 2003 to secure payment to Prime of the $ 1.425 million K & B Cleveland loan. (See PX-13 at second page (page 2 of August 21, 2003 promissory note), and at seventh page (page 1 of security agreement); Kattula (Tr. at Docket # 291) at 105-06).
(Sills (Tr. at Docket # 491) at 56). By contrast, on cross-examination, the Debtor's counsel elicited the following testimony by Sills, about the character for truthfulness of Prime's Aaron Jade:
Id. at 57-58.
Kattula later caused the transfer of the Luna Pier real estate, again without informing Prime, to another Kattula-owned entity named DA Enterprises. Prime learned of this transfer from a title search. (See Levy (Tr. at Docket # 414) at 74-75; see also Simovski (Tr. at Docket # 617) at 77-78).
The Court does not credit Kattula's testimony that there was a third wire transfer to Prime in early October 2004. There is no evidence of such a third wire transfer, other than Kattula's vague and unsubstantiated testimony. Rather, the evidence and the relevant documents admitted into evidence show only the two wire transfers discussed in this Opinion, which were the ones made on October 1, 2004 and October 4, 2004. Kattula is correct about Prime having wired approximately $ 279,000 to K & B on October 5, 2004 — as noted above, K & B's bank statement for October 2004 shows that Prime wired $ 279,344.81 to K & B on October 5, 2004. (Id. at 91; PX-7). But that wire transfer by Prime to K & B represented part of the $ 468,660.09 wire transfer that Prime had received on October 4, 2004, as discussed above.
In his November 14, 2005 e-mail (PX-50), Kattula merely promises to pay the Luna Pier loan off by December 31, 2005. After discussing his proposed terms for the later-executed MOU transaction, Kattula states: "After we agree to these terms and conditions there will be left only two notes payable to Prime from K & B Capital/RTK: Note A $ 1,250,000 (will be paid on or before Dec 31, 2005)."
597 N.W.2d at 22 (citation omitted). See also NL Ventures VI Farmington, LLC v. City of Livonia, 314 Mich.App. 222, 886 N.W.2d 772, 783 (2015) (same).
