Hartford Holdings, LLC v. Mladen (In re Eternal Enter., Inc.)

557 B.R. 277

In re: Eternal Enterprise, Inc. Debtor

Hartford Holdings, LLC, Plaintiff

v.Vera Mladen and Dusan Mladen a/k/a David Mladen, Defendants

Case No. 14-20292 (AMN)

Adv. Pro. No. 15-02034 (AMN)

United States Bankruptcy Court, D. Connecticut, New Haven Division.

Signed September 16, 2016

Thomas A. Gugliotti, Updike, Kelly & Spellacy, Kevin J. McEleney, Updike Kelly & Spellacy PC, Hartford, CT, for Plaintiff.

Robert Ricketts, Law Offices of Robert A. Ricketts, LLC, Hartford, CT, for Defendant.

Memorandum of Decision and Order

Ann M. Nevins, United States Bankruptcy Judge, District of Connecticut

Eternal Enterprise, Inc. (“Debtor”), the chapter 11 debtor and debtor-in-possession in the underlying bankruptcy proceedings here, case number 14-20292 (AMN)(“Main Case”)¹ , is the owner and operator of several hundred residential apartments located in multi-family buildings in Hartford, Connecticut. On July 14, 2015, plaintiff Hartford Holdings, LLC (“HHLLC” or the “Plaintiff”)—a secured creditor in the Main Case—commenced this adversary proceeding objecting to the Debtor's scheduled representation that it owes an unsecured debt of $925,784.00 (the “Purported Loans”) to Vera Mladen and Dusan Mladen a/k/a David Mladen (together, the “Defendants” or the “Mladens”) attributable to various monies the Mladens allegedly advanced to the Debtor during the period in which they were insiders with full control over the Debtor. AP-ECF No. 1 (the “Complaint”).

In addition to objecting to the Debtor's scheduling the Purported Loans as unsecured debt (the “First Count”), pursuant to Fed.R.Bankr.P. 3007(b), the Complaint further seeks to recharacterize the Purported Loans as equity contributions pursuant to 11 U.S.C. § 105(a) (the “Second Count”) or, in the alternative, to equitably subordinate the Purported Loans under 11 U.S.C. § 510(c) (the “Third Count”). After considering the parties' pleadings, memoranda, the relevant documents filed on the docket in this adversary proceeding and the Debtor's main case, the arguments and testimony presented during the trial, and for the reasons that follow, the court finds that the Purported Loans should be recharacterized as an equity contribution pursuant to 11 U.S.C. §§ 105(a) and 502(a), and, therefore, sustains HHLLC's objection to the Purported Loans.²

I. The Trial

A trial on the Complaint was held on May 23, 2016, see AP-ECF Nos. 70 and 71, and concluded on June 8, 2016, see AP-ECF No. 76, after which the court took the matter under advisement. At the request of the parties, the trial was consolidated with Hartford Holdings, LLC v. Goran Mladen , Adv. Pro. No. 15–02035 (AMN) due to the significant overlap in relevant facts. A separate Order and Opinion for Hartford Holdings, LLC v. Goran Mladen , Adv. Pro. No. 15–02035 (AMN) shall enter simultaneously with this Order. Vera Mladen and Dusan Mladen both testified regarding the understanding of the facts and circumstances relevant to the Purported Loans transactions. Goran Mladen—the defendant in Adv. Pro. No. 15–02035 (AMN)—was represented by counsel but was not present at trial and did not testify.

II. Jurisdiction, Venue, and Standing

This court has jurisdiction over this action pursuant to 28 U.S.C. § 1334(b) and 28 U.S.C. § 157(b). This adversary proceeding is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) (matters concerning the administration of the estate), (B) (allowance or disallowance of claims against the estate ... and estimation of claims or interests for the purposes of confirming a plan under chapter 11, 12, or 13 of title 11 ...), and (O) (other proceedings affecting debtor-creditor-equity security holder relationships). This adversary proceeding arises under the chapter 11 Main Case pending in this District; therefore, venue is proper in this District pursuant to 28 U.S.C. § 1409. The Plaintiff, HHLLC, has standing to seek the relief sought in the complaint because, as a holder of secured and unsecured claims in the Debtor's chapter 11 case, it is a party in interest within the meaning of 11 U.S.C. § 1109. Moreover, HHLLC has proposed its own chapter 11 plan that provides for separate classification and disparate treatment of the Mladens' scheduled claim as compared to those of other general unsecured creditors.

III. Findings of Fact

1. On February 19, 2014 (the “Petition Date”), the Debtor filed a voluntary chapter 11 bankruptcy petition. In accordance with 11 U.S.C. §§ 1107 and 1108, the Debtor was and currently remains authorized to continue to operate and manage its business as a debtor and debtor-in-possession. No trustee or examiner has been appointed. See ECF No. 1.

2. The Debtor is a privately held Connecticut corporation, established in 1997, that owns and operates apartment buildings in Hartford, Connecticut.

3. The Debtor is a “family business” operated by Vera Mladen, Dusan Mladen, their son, Goran Mladen, and other members of the Mladen family. Vera Mladen and Dusan Mladen are married to each other, and Goran Mladen is their adult son. Goran Mladen established the Debtor in 1997. See Testimony of Vera Mladen , AP-ECF No. 71 at 30:10-48:37.³ Since its creation, ownership of the Debtor has been transferred from Goran Mladen to Dusan Mladen, and, more recently, to Vera Mladen. Id. According to Vera Mladen's testimony, no other person or entity has ever had an ownership interest in the Debtor. Id. Vera Mladen currently owns 100% of the Debtor and has served as president of the Debtor since before the Petition Date. Id.

4. In both its original Schedule F (“Creditors Holding Unsecured Nonpriority Claims”) filed on March 21, 2014 as ECF No. 53, and its amended Scheduled F filed on July 22, 2014 as ECF No. 86, the Debtor scheduled the Purported Loans as an unsecured debt in the amount of $925,784.00 that it owed to Vera Mladen and Dusan Mladen, together. The Purported Loans were not scheduled as disputed, contingent, or unliquidated.

5. In her capacity as president of the Debtor, and under penalty of perjury Vera Mladen electronically signed⁴ a declaration verifying the truth and correctness of the Debtor's schedules, including the Debtor's original and amended Schedule F. ECF No. 53 at 31; ECF No. 86 at 5.

6. The deadline for filing proofs of claim in the Debtor's bankruptcy was June 23, 2014. The Mladens were not represented individually in the Main Case and did not file a proof of claim in any amount against the Debtor.

7. At trial, the Mladens offered three documents into evidence to substantiate their Purported Loans to the Debtor.

a. First, Defendants' Exhibit 2 is a copy of a bank check in the amount of $785,000.00 payable to the Debtor from Eternity Fortune, Inc. signed by Vera Mladen and dated March 17, 2005. See Def. Ex. 2. Both the Mladens testified that Eternity Fortune, Inc. was a Massachusetts Corporation wholly owned by the Mladens through which the Mladens loaned money to the Debtor. See Testimony of Vera Mladen , AP-ECF No. 70 at 29:09-48:37; Testimony of Dusan Mladen , AP-ECF No. 76 at 11:48-14:11. Dusan Mladen testified that none of the money advanced to the Debtor through Eternity Fortune, Inc. was ever repaid. Id.

b. Second, Defendants' Exhibit 2A is a copy of a bank check in the amount of $180,000.00 payable to the Debtor from Goran's Investors, Inc. signed by Goran Mladen and dated December 16, 2004. Dusan Mladen testified that Goran's Investors, Inc. was a real estate management company based out of Holyoake, Massachusetts through which he loaned money to the Debtor. Testimony of Dusan Mladen , AP-ECF No. 76 at 6:00-11:45. Dusan Mladen further testified that Goran Mladen had authority to sign checks for Goran's Investors, Inc. Id. According to Dusan Mladen's testimony, he authorized his son, Goran Mladen, to write a $180,000.00 check to the Debtor from Goran Investors, Inc.'s operating account. Id. Dusan Mladen further testified that none of the $180,000.00 advanced to the Debtor was ever paid back. Id.

c. Third, Defendants' Exhibit 2B is a copy of a Sovereign Bank deposit slip for $25,000.00 dated December 2, 2005. Dusan Mladen identified the deposit slip as a document memorializing a loan of $25,000.00 from his personal account to the Debtor. Testimony of Dusan Mladen , AP-ECF No. 76 at 20:00-23:40. Dusan Mladen further testified that none of the $25,000 was ever paid back. See id.

8. Although there was no documentary evidence establishing the Mladen's ownership interest in either Eternity Fortune, Inc. or Goran's Investors, Inc., Dusan Mladen testified that the money advanced to the Debtor through these companies belonged to the Mladens and could be transferred between entities without regard to corporate formalities:

Court: Your testimony on direct was that [the money in Goran's Investors, Inc.'s operating account] was “your money.” I'm trying to understand what you mean by that.

A: [W]hen I came into the company, when we purchased properties, Goran's Investors was a shell. Nothing. It had no money. So I gave the money. Who gave the 20% or 30% that we needed to purchase properties? I did .... So, it's my money. I owned it, so why not?

Testimony of Dusan Mladen , AP-ECF No. 76 at 38:34-39:24; see also AP-ECF No. 76 at 6:00-23:40.

9. At trial, Vera Mladen testified that she and Dusan Mladen had made multiple loans to the Debtor during a prepetition period in which the Debtor was experiencing cash flow difficulties due to multiple vacancies. Testimony of Vera Mladen , AP-ECF No. 70 at 25:10. Vera Mladen also testified that the loans had been made with the expectation of repayment “when the company was on its feet ... when the company started to be stable ... started to make its own money.” Id. at 25:50-26:49. Vera Mladen further testified that the Mladens did not memorialize the terms of the Purported Loans in a formal written agreement:

Q: Aside from the check, Exhibit 2, you testified to on direct, you don't have any other written agreements that would evidence any loans in this case?

A: No agreement,

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