Belle v. Shaia (In re Nedrick), Case No. 10-34772-KLP

Chapter 7

MEMORANDUM OPINION

Before the Court are cross-motions for summary judgment filed by the parties in two separate but essentially identical adversary proceedings. The parties have stipulated that venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409 and that these adversary proceedings are core proceedings under 28 U.S.C. § 157(b)(2)(A) and (O). The Court also finds that the actions are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(B) and (K).

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Plaintiff Walton M. Belle initiated both adversary proceedings on August 15, 2016. Each complaint contains the same three counts. Count I seeks recovery pursuant to a setoff right under Va. Code § 49-27, Count II seeks recovery pursuant to "Dissolution of LLC as required by Virginia law," specifying Va. Code Ann. § 13.1-1050.2(C), and Count III seeks recovery on the grounds of unjust enrichment.

The parties maintain that they have stipulated to all relevant facts and agree that no genuine dispute exists as to any material fact relevant to this proceeding. The facts from the parties' stipulation (the "Stipulation") appear below:¹

Debtors Julia C. Nedrick and Cecil Hubert Nedrick (collectively "the Nedricks") are married to each other. On July 7, 2010, Debtor Julia C. Nedrick filed a voluntary petition under chapter 13 of the Bankruptcy Code, Case No. 10-34772, which was converted to chapter 7 on March 21, 2014. Harry Shaia, Jr., was appointed as the chapter 7 trustee in the case.

On May 13, 2010, Debtor Cecil Hubert Nedrick filed a voluntary petition under chapter 13 of the Bankruptcy Code, Case No. 10-33456, which was converted to chapter 7 on March 21, 2014. Harry Shaia, Jr., (the

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"Trustee") was appointed as the chapter 7 trustee in Cecil Nedrick's case as well.

Plaintiff Walton M. Belle ("Belle") was previously married to Armond A. Belle (collectively "the Belles"), who is deceased. Upon her death, all of Armond Belle's assets were devised to Walton Belle.

On or about February 22, 2005, Julia Nedrick formed a Virginia limited liability company known as CHN Development, LLC ("CHN" or the "Company"). In June of 2007, the Belles joined the Nedricks in CHN, with each individual acquiring a twenty-five percent membership interest. Julia Nedrick was appointed as the sole manager of CHN in the CHN operating agreement (the "Operating Agreement").² She remained in that position until the filing of her bankruptcy petition in 2010.

CHN was originally formed for a different purpose but was ultimately used to purchase real property located at 2423 North Lombardy Street in Richmond, Virginia (the "Property"). According to the records of the City of Richmond, CHN purchased the Property on June 26, 2007, for $550,000. This purchase price equaled the combined contributions paid by the four members for their respective membership interests in CHN.

The Belles paid for their membership interests by making a cash payment of $275,000. The Nedricks' membership interests were funded by their payment of $275,000, of which $102,500 came from their own funds and $172,500 came from a personal loan they obtained from the Belles, evidenced

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by a $172,500 promissory note (the "Note") dated June 21, 2007 from the Nedricks that was made payable to the Belles. The Note was secured by a purchase money deed of trust (the "Deed of Trust") executed by CHN on the Property.

Pursuant to the Operating Agreement, upon the "insolvency" (defined to include the filing of an "insolvency" petition) of the manager, CHN would be dissolved and the affairs wound up with its assets liquidated in an orderly fashion, its liabilities satisfied and remaining proceeds distributed to the CHN members according to their ownership interests. "The filing of Julia [Nedrick]'s Bankruptcy . . . Petition mandated the dissolution and termination of CHN pursuant to paragraph 12(a) of the Operating Agreement. Prior to Julia's bankruptcy, no successor Manager was elected."³ The CHN corporate charter was revoked and terminated by the Virginia State Corporation Commission on or about May 31, 2015, as a result of the failure of CHN to file appropriate fees.

Following the dissolution of CHN, the Trustee, "as successor to the rights of Julia [Nedrick] as Manager," began the process of winding down CHN by, among other things, the proposed auction sale of the Property, which was the primary asset of CHN. On December 14, 2015, the Trustee moved to sell the Property pursuant to § 363(b) of the Bankruptcy Code. By order entered January 13, 2016 (the "Order"), the Court granted the Trustee permission to sell the Property via an auction sale, free and clear of all

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existing liens and interests pursuant to § 363(f)(3) of the Bankruptcy Code and provided that any liens on the Property would attached to the sale proceeds.

The auction of the Property resulted in a high bid of $627,000. "The lien of the Deed of Trust was released from the Property by operation of the Order and the lien attached to the proceeds of sale. The sale proceeds which were company property of CHN were used to pay the Note which previously was not satisfied by the Nedricks."⁴ "The amount paid to satisfy the Note was $255,429.19,⁵ which was the balance due after paymenst [sic] of $89,621.14 had been made by the Nedricks over the years. This payoff included default interest at the rate of 18% per annum compared to the contract interest rate of 6%. The payoff calculated with the default interest exceeded the payoff calculate [sic] at the contract rate by $108,141.27. The Trustee paid auctioneer expenses, commissions from the sale and satisfied the Note and lien in full, resulting in net proceeds to CHN of $268,714.21. In addition to the sales proceeds, the Trustee is holding approximately $18,000 of CHN rent, which was generated from tenants on the Property prior to its sale. Their [sic] remains to be distributed as part of the continued wind down of CHN the approximate sum of $286,714.30."⁶

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Attached to the Stipulation are four exhibits: A) the Operating Agreement, B) a summary in graph form of the capital structure of CHN, C) the Note, and D) the Deed of Trust.

Rule 56 of the Federal Rules of Civil Procedure, Fed. R. Civ. P. 56, made applicable to adversary proceedings pursuant to Fed. R. Bankr. P. 9014 and 7056, provides that a court shall grant summary judgment upon a showing that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Here, although each party opposes the granting of summary judgment in favor of the other, neither party points to the absence (or genuine dispute) of a fact necessary to rule in the other party's favor. The parties would have the Court accept, as they apparently are prepared to do, that only questions of law must be decided in order to properly resolve the issues before the Court.

The papers filed by both the Trustee and Belle outline the following summary of funds received into the estate:

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The essence of the parties' dispute is that they differ in their approach over how the net sale proceeds of $542,143.40 received by the Trustee should be distributed. The Trustee proposes to first reduce the $542,143.40 amount by the $255,429.10 paid in satisfaction of the Nedricks' Note, resulting in $286,714.30 remaining to be distributed. He then proposes to divide that amount equally between Belle (now the owner of a 50% share of the Company as a result of his wife's death) and the Nedricks. Under this analysis, Belle would receive $143,357.15, and the Nedricks' bankruptcy estates would receive the other $143,357.15.

Belle, on the other hand, contends that the entire $542,143.40 should first be divided equally, resulting in $271,071.70 for himself and the same for the Nedricks' bankruptcy estates. He maintains that by paying the Note, CHN became entitled to "reimbursement/setoff" from the Nedricks' share pursuant to Va. Code Ann. § 49-27. He therefore seeks to reduce any distribution due to the Nedricks by the $255,429.10 paid by the Trustee relative to the Deed of Trust.⁸ This would result in a final distribution to the Nedricks' estates of only $15,642.60.⁹ This scenario would result in a total payment to Belle of the entire amount purportedly due under the Note as well as half of the proceeds from the liquidation of CHN's Property (in other words, what Belle would have received had there been no bankruptcy and

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had the Nedricks simultaneously paid the balance owed under the Note at the default interest rate).

It would perhaps be easier for all concerned if the Court were willing to agree that the parties have presented the only two possible alternatives. The Court might then choose one of those alternatives and allow the parties to be on their respective ways. But the parties have chosen to invite the Court's scrutiny, and the Court is not yet convinced that only questions of law remain, thus making the path to choosing one, or neither, of the two alternatives more laborious. The lack of a sufficient record compels the Court at this stage of the proceedings to reject both proposed...