Mukamal v. D.R. Horton, Inc. (In re Majorca Isles Master Ass'n, Inc.)

560 B.R. 824

In re: Majorca Isles Master Association, Inc., Debtor.

Barry Mukamal, Trustee of the Bankruptcy Estate of Majorca Isles Master Association, Inc., Plaintiff,

v.D.R. Horton, Inc., Rafael Roca, Amalia Papadimitriou, Christian Gausman and Karl Albertson, Defendants.

Case No. 12–19056–BKC–AJC

Adv. No. 14–1142–BKC–AJC–A

United States Bankruptcy Court, S.D. Florida.

Signed October 21, 2016

John Arrastia, Jr., Genovese Joblove & Battista, P.A., Michael A. Friedman, Barry E. Mukamal, Miami, FL, for Plaintiff.

Ken Taninaka, Salomon, Kanner, Damian & Rodriguez, PA, Vincent E. Damian Jr., Esq., Miami, FL, Kevin A. Reck, Esq., Orlando, FL, for Defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

A. Jay Cristol, Judge, United States Bankruptcy Court

THIS CAUSE came before this Court for a three day trial commencing on August 24, 2016, upon Plaintiff Barry Mukamal's First Amended and Supplemental Complaint for Damages, Deceptive Practices, and Equitable Relief ("Complaint") [D.E. 207] suing D.R. Horton, Inc. ("D.R. Horton" ) and Rafael Roca, Amalia Papadimitriou, Christian Gausman, and Karl Albertson (collectively, "Individual Defendants" ) and Defendants' claim for Setoff and Counterclaim [D.E. 213].

The trial of this case tells a modern day story of David and Goliath. Goliath is D.R. Horton, a New York Stock Exchange company and self-described largest residential developer in America. David is Debtor Majorca Isles Master Association, a homeowners association created by D.R. Horton pursuant to Florida Statute Chapter 720 to represent the interests of unit owners in an originally planned 681 unit project which D.R. Horton called Marjorca Isles, located in Miami Gardens, Florida. Majorca Isles was and is a low to moderate income residential community.

In about 2005, D.R. Horton began a project to construct and sell 681 condominium units and single family homes in Miami Gardens, Florida. The project contemplated about 40 condominium buildings consisting of about 9 condominium associations and a homeowners association named Majorca Isles Master Association. The project was to include two swimming pools, two clubhouses, as well as security. Three hundred forty (340) condominium units in building phases I, II, III, IV and V were constructed by about 2009. The units sold for an average of about $300,000 or more and were generally financed by mortgages from the Federal Housing Authority. Ultimately, three hundred fifty-five (355) units were sold.

As was customary pursuant to Chapter 718 and Chapter 720, Florida Statutes, D.R. Horton created five (5) condominium associations and a master homeowners association, all of which D.R. Horton controlled. D.R. Horton appointed four of its employees as directors of the condominium associations and the homeowners association.

As required by Florida Statute Chapter 718 and 720, Florida Statutes, D.R. Horton began paying the monthly maintenance obligation on the unsold units and paid deficit funding on the project while it still controlled the associations, pending turnover of the associations to the unit owners.

Along came the economic recession. Condominium sales slowed and stopped. With no market, D.R. Horton stopped building, with 355 units completed, and it withdrew the remaining portion of the Majorca Isles project—which it had every legal and contractual right to do.

Because of the economic downturn and loss of jobs, many condominium owners were not paying their monthly maintenance assessments. Debtor had a need for about $40,000 a month to pay its obligations and only $20,000 a month was coming in. The collections of both the condominium associations and the master homeowners association monthly maintenance payments were being made by the five condo associations, and they were obligated to forward the master homeowners association portion of the assessments to the Debtor. However, there was not enough income to cover the condominium association expenses and the master homeowners association expenses.

A conflict of interest thereupon developed for Rafael Roca, Amalia Papadimitriou, Christian Gausman, and Karl Albertson, employees of D.R. Horton who were Horton-appointed directors of the condominium associations and the master homeowners association. At this point, they were wearing three hats: D.R. Horton employees, homeowners association directors and condominium association directors. They owed a duty to the condominium associations and a conflicting duty to the master homeowners association where they were also directors. They decided to favor the condominium associations over the homeowners association and diverted funds due the homeowners association to condominium association expenses, thereby breaching their fiduciary duty to the homeowners association.

To a point, D.R. Horton was fulfilling its obligation to deficit fund the condominium association and homeowner association expenses. However, this was a sad economic time and Horton was facing losses on the Majorca Isles project. Condominium purchasers who bought units at $300,000+ were each facing unrealized losses of from $180,000 to $220,000 on each unit. At this time, the Miami–Dade County property appraiser valued the units purchased from D.R. Horton for $300,000 or more, at between $80,000 and $120,000.

When it appeared that the deficit funding obligation to D.R. Horton was reaching $50,000 per month, D.R. Horton, through its employees, decided to shift the economic loss of D.R. Horton to the homeowners by cutting services and amenities which the homeowners were entitled to receive and stopping the deficit funding that D.R. Horton was obligated to supply.

These actions by D.R. Horton can only be classified somewhere between not nice and evil. The responsibility for D.R. Horton's actions is on D.R. Horton by virtue of D.R. Horton's employees Rafael Roca, Amalia Papadimitriou, Christian Gausman, and Karl Albertson wearing their three hats, as D.R. Horton employees and agents [for which their acts are the responsibility of D.R. Horton under respondeat superior ], and as directors who controlled both the condominium associations and the master homeowners association.

In the face of the losses on the project, D.R. Horton implemented turnover of the associations and cast off the condominium associations and the homeowners to fend for themselves.

Soon after turnover, the gaping holes in the funding became readily apparent. With insufficient funds to timely pay its obligations, the master homeowners association filed this Chapter 11 case and Barry Mukamal became the Trustee.

It is important to recognize and comment upon the actions of the Chapter 11 Trustee, Barry Mukamal, because what he did here was extraordinary. Mr. Mukamal was appointed in a case with no assets and no cash. He could not have been criticized for performing a minimum amount of trustee's duties with prospect of little or no compensation. Instead, he saw the Debtor not as a defunct corporate entity, but as an association representing 355 low or moderate income families not capable of fending for themselves against a multi-million dollar financial giant. Barry Mukamal took it upon himself to expend hundreds of thousands of dollars, which might never be reimbursed to him, to investigate and prepare a lawsuit to provide a remedy for a wrong perpetrated by a greedy corporate giant. He is to be praised for his selfless conduct as a trustee acting in the finest tradition of a fiduciary.

In the end, the Court wonders why this case came to trial, as the Defendants failed to present any credible evidence in defense of the allegations in the Complaint. The testimony of the Defendants and their experts irrefutably support the Trustee's case. Karl Albertson, for example, admitted he and D.R. Horton were aware of the obligations that the Local Associations owed to the Master Association and that the Master Association owed to the unit owners under the condominium documents but disregarded those duties and obligations. Likewise, the testimony of Amalia Papadimitriou, while intentionally evasive, revealed she knew of her responsibilities and fiduciary duties as a Board member of the Master Association and intentionally breached those duties, for D.R. Horton's benefit and financial gain. Even Craig Vaughn's testimony, on behalf of Castle Management, supported the Trustee's case.

Additionally, the testimony of Steven Gladstone, CPA during his cross-examination highlighted the inaccurate and manipulative accounting that D.R. Horton used to reclassify debt to avoid paying its obligations to the Master Association. Finally, for some unexplainable reason, the Defendants offered Viresh Dayal, CPA to provide expert testimony; however, Mr. Dayal offered no relevant testimony regarding any of the evidence admitted at trial. He was not credible or coherent and his testimony proved worthless.

It is against this backdrop, and upon thorough consideration of the evidence adduced at trial and observation of the candor and demeanor of the witnesses, that the Court makes the following findings of fact and conclusions of law in conformity with Rule 52(a)(1) of the Federal Rules of Civil Procedure, made applicable to this adversary proceeding by Rule 7052 of the Federal Rules of Bankruptcy Procedure.

FINDINGS OF FACT

Majorca Isles is Developed by D.R. Horton

D.R. Horton is the largest residential homebuilder in the United States. (Pl. Ex. 135 at P. 93, L.10–11; Tr. 242, L. 7–12).¹ In 2005, D.R. Horton planned, developed, and began construction of Majorca Isles, a sprawling community of five condominium phases which were to be comprised of forty (40) buildings located in Miami Gardens, Florida, with the intent of selling condominium units to the consuming public. (Tr. 27). Each phase of Majorca Isles was set up to be independently controlled by its own condominium association. At all times material, each individual phase condominium association has been responsible for the maintenance of its own common area,...