Goldstein v. Weeks St., LLC

GOLDSTEIN, Plaintiff, v. WEEKS STREET, LLC, Defendant.

Case No. 16-cv-00856-BLF

Case No. 16-cv-01066-BLF

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION

February 13, 2017

ORDER AFFIRMING ORDERS OF THE BANKRUPTCY COURT

This matter is before this District Court on appeal, pursuant to 28 U.S.C. § 158(a), from the United States Bankruptcy Court for the Northern District of California (the "Bankruptcy Court"). Appellants Samuel Goldstein, William Kennedy, Chacko Neroth, Pravin Patel, Suraj Puri, and Khatera Said ("Appellants") appeal two orders from the Bankruptcy Court. In Appellate Case No. 16-cv-01066, the Appellants appeal from the order in which the Bankruptcy Court denied a motion for reconsideration of an order converting a Chapter 11 estate to Chapter 7. See Order Denying Reconsideration, ECF 7-93; Order Granting Motion to Convert Case to Chapter 7 ("Conversion Order"), ECF 4-53.¹ Appellee First National Bank of Northern California ("FNB") filed a response brief, to which Weeks Street, LLC and Nexgen Builders, Inc ("Nexgen") joined. ECF 25, 33, 34, No. 16-01066. Appellee FNB has also moved to dismiss certain Appellants from appeal and has filed a motion seeking clarifications relating to items Appellants submitted for their record on appeal in Appellate Case No. 16-cv-01066.

In Appellate Case No. 16-cv-00856, Appellants appeal from an order in which the Bankruptcy Court authorized the Chapter 7 Trustee to enter into settlements with FNB and Nexgen regarding a state court action. See Order Granting Motions to Authorize Settlements with FNB and Nexgen. ("Settlement Order"), ECF 7-94. Appellees Fred Hjelmeset, FNB, and Nexgen separately filed their response briefs. ECF 27, 31, 35.

Because all the issues relating to the two appeals and FNB's motions stem from the same Bankruptcy Court case and concern the same set of facts, this Court will address them together in this Order.

I. BACKGROUND

Weeks Street, LLC ("Debtor"), whose sole member is William Kennedy, contracted with Nexgen, Inc. ("Nexgen") to develop residential properties in East Palo Alto, California in two phases. Settlement Order 2; Nexgen Phase I Contract, ECF 8-74; Hjelmeset's Excerpt of Record ("ER") 13, 37, ECF 28. A number of units were completed during phase I in 2006 and sold. ER 37, 65. To finance phase II of the construction, Debtor entered into several agreements with FNB in March 2006, including a Construction Loan Agreement and a Disbursement Schedule. Id.; Construction Loan Agreement, ECF 8-44, et seq.; Disbursement Schedule, ECF 8-52. FNB's loan was secured by a first priority deed of trust encumbering Debtor's properties to be developed in East Palo Alto, with a promissory note in favor of FNB in the original principal amount of $6,959,375. Promissory Note, ECF 12-2. In addition to FNB's deed of trust, the Debtor's properties were also encumbered by junior liens in favor of Nexgen, Pravin Patel, and Suraj Puri. ER 19, 65.

Toward the end of phase II, Debtor started to have a series of disputes with Nexgen regarding payments sought by Nexgen and Nexgen's performance under the contract. Nexgen Phase II Contract, ECF 8-75, et seq; ER 66-67. For example, in May 2007, Debtor determined that Nexgen was only entitled to $305,946 based on Nexgen's twelfth invoice requesting $664,727 ("Draw No. 12"). Id. FNB asserts that it was ready to approve the full amount and deliver the funds to Debtor to pay Nexgen. Id. at 31, 60. However, according to FNB, since Debtor did not approve the full amount, Nexgen did not receive any payments for Draw No. 12. Id. Nexgen thenrecorded mechanic's liens on eight of the houses in development. Id. at 31, 38, 60, 66; ECF 20-13.

Nexgen's mechanic's liens and liens from subcontractors stopped four houses in escrow from closing and prevented any others from selling. Ex. A to Objection to Nexgen's Claim 2, ECF 20-20; ER 31. Although FNB claims that it asked Debtor to remove the mechanic's liens, the liens remained. FNB's Summ. J. Mot., Tab 14, Ex. 2, pp. 6, 13, ECF 26, No. 16-01066. In June 2007, FNB sent a letter informing Debtor of its failure to make interest payments on the loan. Id. at 7; ER 31. Soon thereafter, FNB recorded a notice of default against the properties and sought to foreclose. ER 31. Around the same time in June 2007, Debtor filed a complaint in San Mateo County Superior Court in an attempt to expunge or allocate Nexgen's lien. Id.; ECF 20-13. In August 2007, the San Mateo County Superior Court ordered allocation of the lien equally among the unsold properties. ER 31; ECF 20-13. Nexgen then commenced litigation to enforce the lien. ER 31.

A. Chapter 11 Phase

Because Debtor, FNB, and Nexgen were unsuccessful in resolving their disputes, Debtor commenced a Chapter 11 case in December 2007 to forestall FNB's foreclosure sale. Id. at 31-32. During the Chapter 11 phase of this case, between April 2008 and August 2009, Debtor completed the phase II home construction and sold all of the completed homes, paying down a material portion of FNB's promissory note. ER 32; Settlement Order 3. The only real property remaining in the estate consisted of four undeveloped lots ("Lots"), subject to the senior lien of FNB. Id. at 3.

In November 2010, Debtor filed a complaint against FNB and Nexgen, asserting over twenty claims for relief in San Mateo County Superior Court (the "Lawsuit"). ER 32; Settlement Order 3. The complaint alleged, among other things, that FNB and Nexgen conspired to take the East Palo Alto properties from Debtor by improperly recording the mechanic's liens and the notice of default. Id. After extensive motion practice, at the time the Bankruptcy Court ordered the conversion to Chapter 7 in March 2016, the only remaining claims against FNB in the Lawsuit included breach of contract, fraud, and wrongful foreclosure; and the only remaining claim againstNexgen was breach of contract. Id. FNB and Nexgen had also filed cross-complaints against Debtor. Id. In 2014, the Superior Court entered two orders awarding monetary sanctions of $3,360 and $7,352 against Debtor and in favor of FNB and Nexgen, for failure to comply with discovery. ER 32.

B. Conversion to Chapter 7

In July 2015, the Bankruptcy Court ordered Debtor to confirm a plan by January 2016. Settlement Order 3. Immediately thereafter, Debtor moved to dismiss the bankruptcy case. Id. FNB and Nexgen opposed the motion and urged conversion instead. Id. Debtor then moved to withdraw the motion to dismiss. The Bankruptcy Court conditioned the withdrawal on payment of reasonable attorneys' fees to FNB and Nexgen in opposing Debtor's motion to dismiss. Conversion Order 2-3; ER 141 et seq. Based on Debtor's agreement to withdraw the motion, the Bankruptcy Court entered a sanction order on September 16, 2015, against Debtor, awarding attorney fees of $17,523 to FNB and $11,321.25 to Nexgen. Id. FNB also moved to convert the case to Chapter 7 on September 2, 2015. Nexgen's RJN ("Bankr. Dkt."), ECF 35-7. Debtor filed a Chapter 11 reorganization plan the next day on September 3, 2015 ("Plan"). Id.

The Bankruptcy Court found several issues with the Plan that would prevent it from being confirmed. Conversion Order 5. First, the Plan stated that the creditors will be paid from the proceeds of the Lawsuit and made no mention of a settlement. Id. at 6. In addition, FNB and Nexgen would not be paid anything under the Plan. Id. Another is that FNB and Nexgen asserted that their unsecured claims were improperly classified, leaving other creditors to vote as a block, effectively preventing FNB and Nexgen from blocking the Plan's approval. Id. at 5-6.

On September 28, 2015, the Bankruptcy Court granted the motion to convert the case to Chapter 7 and Mr. Fred Hjelmeset was appointed trustee of the estate. Conversion Order; Hjelmeset Br. 6, ECF 27; Order Denying Reconsideration 1. The Bankruptcy Court found that Mr. Kennedy, as the sole member of Debtor, abdicated his fiduciary duty as the debtor-in-possession by making no offers to settle the Lawsuit and preferred to "roll the dice on the Lawsuit" which would potentially benefit him. Conversion Order 10. As such, the court found that the conversion to Chapter 7 was warranted and appointment of a trustee would be in the bestinterest of the creditors and the estate. Id. at 16. Debtor moved for reconsideration of the order converting the case to Chapter 7, which the Bankruptcy Court denied on February 16, 2016. Id. Following conversion, the Lawsuit's jury trial was continued to February 29, 2016. Settlement Order 3; Appellants' Opening Br. 4 ("AOB-s"), ECF 21.

After conducting a review of the documents relating to the affairs of the estate, including the discovery and pleadings in the Lawsuit, Trustee Hjelmeset moved on January 19, 2016 for an order authorizing the Trustee to enter into settlements with FNB and Nexgen. Settlement Order 1, 4. The terms of the settlements are as follows. FNB agreed to pay the Trustee $88,007.20. Id. at 5. FNB will conduct a foreclosure sale of the lots, and credit bid no less than $250,000, and then deliver the title of the Lots to Trustee. Id. Any gross sale proceeds will also be remitted to the Trustee. Id. FNB will waive the right to collect sanctions against Debtor imposed by the Superior Court and by the Bankruptcy Court. The foreclosure on the Lots will eliminate the junior liens claimed by Patel and others. Id. As for Nexgen, Nexgen agreed to pay the Trustee $50,000 and to waive its right to collect sanctions against Debtor. Trustee will dismiss the Lawsuit against FNB and Nexgen, who will in turn withdraw their cross-complaints. Id. Both FNB and Nexgen will also withdraw their proofs of claims in the bankruptcy case. Id. On February 16, 2016, the Bankruptcy Court granted the motion authorizing the Trustee to enter into settlements with FNB and Nexgen under the proposed terms. Id. at 16.

On March 2, 2016, in accordance with the settlement agreements, ...