In re Johnson

IN RE: PHYLLIS ADELE JOHNSON Debtor.

CASE NO. 18-71446

UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF VIRGINIA ROANOKE DIVISION

July 27, 2020

CHAPTER 13

MEMORANDUM OPINION

This matter comes before the Court on an objection to Proof of Claim Number 8 of James D. Carter ("Carter") filed on March 1, 2019 by the Debtor, Phyllis Adele Johnson (the "Debtor"). Discovery was lengthy and, prior to a trial set for October 2019, the parties requested the matter be referred to mediation. The Court granted that request, but the mediation was unsuccessful. A new trial date was set for June 18, 2020. At trial, Carter and the Debtor each testified and numerous exhibits were admitted into evidence. At the conclusion of the hearing, the Court took the matter under advisement. For the reasons that follow, the objection to claim will be sustained in part and overruled in part.

FINDINGS OF FACT

This case involves two people from disparate professional backgrounds who got into the real estate investment business together. Carter is a veterinarian and the Debtor was once a patron of his clinic, as Carter treated animals she owned. In the course of that relationship, Carter learned that the Debtor supposedly had real estate investment experience, including knowledge of using historic rehabilitation tax credits, and Carter advised her that he had cash he would like to invest in a real estate venture. The Debtor advised she could put his cash to work.¹ As the record established at trial, Carter's communications with the Debtor over the course of their dealings together were erratic and infrequent. For a number of years, Carter was, at best, an absentee inquisitor as to most of the Debtor's dealings in their relationship. That relationship soured over time, primarily because bills were not being paid on time and Carter was having to pump additional cash into the venture. The Debtor eventually ran into her own financial difficulties, and to no surprise, so did the real estate venture with Carter.

As a result of her financial difficulties, the Debtor filed a voluntary petition for relief under Chapter 13 of the United States Bankruptcy Code on October 24, 2018. Her Chapter 13 plan has not been confirmed. As Carter is her dominant creditor, until her relationship and debts to Carter can be determined, it will be difficult, if not impossible, for the Debtor to propose a confirmable plan.

On December 27, 2018, Carter filed Proof of Claim Number 8 for funds used or owed in the joint real estate venture. On March 1, 2019, the Debtor filed an objection to the Claim disputing that the Debtor is liable to Carter for all of the amounts listed on the Claim andasserting that the Debtor is entitled to multiple credits against any balance determined to be owed to Carter. On March 19, 2020, Carter filed Amended Proof of Claim Number 8 (the "Claim") asserting that he is entitled to a general unsecured claim in the Debtor's case for $380,141.53. The amount consists of: (1) $108,000.00 for payments due under a partnership agreement; (2) $15,373.14 for repayment of real estate taxes; (3) $24,239.97 for reimbursement of current delinquent real estate taxes as listed on the Debtor's schedules; (4) $55,702.00 in unpaid rents from rental properties; (5) $99,344.66 for sums due secured by a credit line deed of trust to the Bank of Botetourt; (6) $2,743.91 for late fees and penalties on debts to the bank; (7) $41,891.85 in attorney's fees; (8) $15,600.00 in unaccounted for checks drawn from the renovation account; and (9) $17,246.00 in rental commissions taken by the Debtor without the agreement of Carter. The Debtor argues that the Claim does not reflect that the partnership's assets, consisting of rental real estate on Woods Avenue (the "Woods Property") and on Allison Avenue (the "Allison Property") in Roanoke, Virginia, are available to be liquidated to repay a portion of the funds.

The Claim arises out of a largely undocumented joint venture between the Debtor and Carter. The arrangement was that Carter would provide most of the funds to purchase and renovate properties and the Debtor would provide her experience to rehabilitate and maintain the properties. The Debtor and Carter agreed that they would search for properties that would qualify for participation in the historic tax credit program. The only written agreement between the parties is a document signed by the Debtor and Carter on January 10, 2003, entitled "Partnership Agreement" which reflects a "capital contribution" made by Carter "for the purpose of renovation of properties owned by the partnership." Carter's Ex. 2. The Partnership Agreement further states that Carter's capital contributions would be repaid "[u]pon sale of theproperty located at 421-423 Woods Ave., S.W., Roanoke, Va. and belonging to Johnson-Carter Investments."²

On July 25, 1995, the Debtor and Carter purchased the Woods Property and took title in their individual names as tenants in common. Debtor's Ex. B. On May 31, 1996, the Debtor and Carter purchased the Allison Property and again took title in their individual names as tenants in common. Debtor's Ex. C. On November 8, 1996, the Debtor and Carter executed a $100,000.00 credit line deed of trust with the Bank of Botetourt to fund renovations and maintenance of the properties. Carter's Ex. 4. Through October 1997, the Debtor and Carter borrowed $80,027.00 on the line of credit. Debtor's Ex. M, 2. On October 9, 1997, the parties paid the line of credit down to zero. Debtor's Ex. M, 3.

On December 5, 1997, the Debtor submitted an application for the historic tax credit for the Woods Property. The Commonwealth of Virginia Department of Historic Resources certified the Woods Property as eligible for the historic tax credit on April 30, 1998. Debtor's Ex. N. On July 15, 1999, the Debtor submitted an application for the historic tax credit for the Allison Property. The Commonwealth of Virginia Department of Historic Resources certified the Allison Property as eligible for the historic rehabilitation tax credit on April 11, 2000. Debtor's Ex. O.

The parties originally intended to renovate the two properties, qualify for the historic tax credits, and then sell the properties. However, upon finishing the renovation of each property, the properties were rented instead of sold. Since the properties were rented, the Debtor managed the properties including getting tenants and collecting rent. Carter appeared to agree with this.

On August 24, 2014, Carter discovered that the City of Roanoke real estate taxes for the Allison and Woods Properties were unpaid. Carter paid $15,373.14 to the City of Roanoke from his personal funds to clear up the tax debt. Carter's Ex. 6, 1. As discussed below, there are numerous other components of the Claim that Carter asserts are directly caused by the Debtor's actions or inactions, which give rise to the sums claimed in the case, including the Debtor taking substantial real estate management commissions to which Carter never agreed. The Debtor asserts that many of the sums claimed are not due Carter, or that she is entitled to credits against the Claim asserted. It is undisputed that both the Woods and Allison Properties are currently listed for sale with a realtor. Whether they will bring enough to pay the secured liens against the properties, and the debts due Carter, remains to be seen.

JURISDICTION

This Court has jurisdiction of this matter by virtue of the provisions of 28 U.S.C. §§ 1334(a) and 157(a) and the referral made to this Court by Order from the District Court on December 6, 1994 and Rule 3 of the Local Rules of the United States District Court for the Western District of Virginia. This Court further concludes that this matter is a "core" bankruptcy proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A) and (B).³

CONCLUSIONS OF LAW

I. The Applicable Law

A. Burden of Proof

Section 502 of the Bankruptcy Code governs the allowance of claims to be paid from the bankruptcy estate. See In re Harford Sands Inc., 372 F.3d 637, 640 (4th Cir. 2004) ("TheBankruptcy Code establishes a burden-shifting framework for proving the amount and validity of a claim."). When a claimant files a proof of claim with the required supporting documentation, it is prima facie evidence of the claim's validity and the amount owed by the debtor. In re Falwell, 434 B.R. 779, 783 (Bankr. W.D. Va. 2009). "The burden then shifts to the debtor to object to the claim" and to "introduce evidence to rebut the claim's presumptive validity." Harford Sands, 372 F.3d at 640. The evidence "must be sufficient to demonstrate the existence of a true dispute and must have probative force equal to the contents of the claim." Falwell, 434 B.R. at 784. "If the debtor offers such evidence, the burden shifts back to the creditor to produce evidence meeting the objections and establishing the claim." Id. "If the claimant cannot produce sufficient evidence, the claim fails, and the court should sustain the objection." In re Hilton, No. 12-61102, 2013 WL 6229100, at *5 (Bankr. W.D. Va. Dec. 2, 2013).

B. Organizational Structure

The parties in this case are two people who never should have gotten into business with each other, certainly without documenting their rights and responsibilities with one another. Nevertheless, they did go into business together, and the Court is left to sort out the shambles of their failed relationship. There is no question the law of Virginia applies to this relationship.

In PGI, Inc. v. Rathe Productions, Inc., 265 Va. 334, 342, 576 S.E.2d 438 (2003), the Virginia Supreme Court stated as follows:

In Legum Furniture Corp. v. Levine, 217 Va. 782, 787, 232 S.E.2d 782, 786 (1977), we cited 46 Am.Jur.2d Joint Ventures §§ 36, 37 with approval as follows:

The rights, duties, and obligations of joint venturers and of members of syndicates, as between themselves, depend primarily upon the terms of the contract by which they assumed that relationship. They are

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