MV Realty PBC, LLC v. Office of Attorney Gen. (In re MV Realty PBC, LLC)

658 B.R. 194

IN RE: MV REALTY PBC, LLC, et al., Debtors.

MV Realty PBC, LLC, et al., Plaintiffs, v. Office of the Attorney General,State of Florida, Department of Legal Affairs, et al., Defendants.

Case No. 23-17590-EPK (Jointly Administered)

Adv. Proc. No. 23-01211-EPK

United States Bankruptcy Court, S.D. Florida, West Palm Beach Division

Signed February 7, 2024

John Constantine Gekas, Chicago, IL, Michael D. Seese, Esq., Ft. Lauderdale, FL, for Plaintiffs.

Alison L. Archer, Cleveland, OH, Daniel David Bahls, Springfield, MA, Renee Cadmus, Newark, NJ, Eric Carnevale, Boston, MA, Allison L. Carr, Pittsburgh, PA, Keith Turner Clayton, Raleigh, NC, Heather M. Crockett, Office of Indiana Attorney General, Indianapolis, IN, Patrick Crotty, Jennifer H. Pinder, Ellen K. Lyons, Sean Phillip Saval, Miles Vaughn, Tampa, FL, Schuyler Daum, Boston, MA, Asa Edwards, Raleigh, NC, G. Steven Fender, Fender, Bolling and Paiva, P.A., Ft. Lauderdale, FL, Lillian Leona Frank, Office of

Indiana Attorney General, Indianapolis, IN, Patricia D. Lazich, Cleveland, OH, Christopher Robert Meyer, Newark, NJ, Lauren A. Michaels, PA Office of Attorney General, Pittsburgh, PA, Brian Rabinovitz, N.C. Dept. of Justice, Raleigh, NC, Melissa L. Van Eck, PA Office of Attorney General, Harrisburg, PA, Debra Djupman Warring, Philadelphia, PA, for Defendants.

ORDER ABSTAINING FROM AND DISMISSING ADVERSARY PROCEEDING

Erik P. Kimball, Chief United States Bankruptcy Judge

This matter comes before the Court on the following motions to dismiss this adversary proceeding:

(1) Motion to Dismiss Adversary Proceeding by Defendant States Massachusetts, New Jersey, North Carolina, and Pennsylvania [ECF No. 55];

(2) Defendant Office of the Attorney General of Indiana's Motion to Dismiss Amended Adversary Complaint [ECF No. 61];¹

(3) State of Ohio, Department of Commerce's Memorandum in Support of the Motion to Dismiss Adversary Proceeding [ECF No. 65];² and

(4) Motion to Dismiss Amended Adversary Complaint [ECF No. 68] filed by the State of Florida.

The Court carefully considered the foregoing motions to dismiss (collectively, the "Motions to Dismiss"), the Amended Adversary Complaint for Injunctive Relief [ECF No. 41] (the "Complaint"), the Plaintiffs' Omnibus Response to Defendants' Motions to Dismiss [ECF No. 105], and the related replies [ECF Nos. 133, 134, 135, and 136].

SUMMARY OF RULING

The defendants raised a number of arguments in their Motions to Dismiss. In the end, the Court need only address a few of the defendants' arguments to rule on the Motions to Dismiss.

This Court has subject matter jurisdiction over the present adversary proceeding, which is a suit that could only be brought in the court presiding over the plaintiffs' chapter 11 cases. As an action under 11 U.S.C. § 105(a) aimed at protecting property of the estate under 11 U.S.C. § 541 consisting of substantial contract rights and documents recorded in real property records, this adversary proceeding is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2). However, although this Court has subject matter jurisdiction over this core proceeding, the Court will abstain from and dismiss this action for two reasons. First, the relief requested by the plaintiffs constitutes an unprecedented attempt to interfere with the procedural and substantive rights of the defendant states under applicable non-bankruptcy law in actions they are pursuing elsewhere, a threat to the interests of comity of the highest order, meriting abstention under 28 U.S.C. § 1334(c)(1). Second, even if all of the allegations in the Complaint are proven, the circumstances of this case do not warrant the exceptional relief of enjoining, in any regard, the defendants' actions which are explicitly excepted from the automatic stay under 11 U.S.C. § 362(b)(4).

PLAINTIFFS' BUSINESS

The nine plaintiffs and their 25 affiliates filed voluntary chapter 11 petitions on September 13, 2023. The plaintiffs are operating entities doing business in the states of Florida, Pennsylvania, New Jersey, Ohio, North Carolina, Massachusetts, Indiana, and Illinois, and the ultimate parent entity of these operating entities.

According to the Complaint, in 2018 the plaintiffs implemented the "Homeowner Benefit Program." The operating plaintiffs entered into Homeowner Benefit Agreements ("HBAs") with residential homeowners. The plaintiffs state that the HBAs are not listing agreements but are contracts having a term of 40 years "under which the plaintiffs pay an upfront cash payment to homeowners in exchange for the exclusive right to list a homeowner's home if the homeowner ever decides to sell their home." Under the HBAs, if a homeowner wishes to sell their home the plaintiffs or their assignees list and sell the home for a commission of 6%. If the home does not sell within 6 months, the homeowner may sell the property by other means for a period of 60 days, failing which the plaintiffs retain their rights under the HBA. If a homeowner breaches an HBA, there is an early termination fee equal to 3% of the greater of the market value of the home on the date of the HBA or the market value at the time of breach. In spite of the plaintiffs' argument that an HBA does not create a present lien on a homeowner's property, the plaintiffs reserve the right to record a mortgage or memorandum of the HBA in the relevant real property records and it appears that they initially did so with regard to every HBA. In the Complaint, the plaintiffs state that there are approximately 34,000 outstanding HBAs. More recently, the debtors have suggested there are approximately 38,000 existing HBAs plus about 2,000 HBAs under which the debtors have received payment. These figures are for all HBAs held by all debtors in these jointly administered chapter 11 cases, not just the plaintiffs in this adversary proceeding. The plaintiffs state that about 40% of the outstanding HBAs are held by the plaintiffs.

PENDING STATE ACTIONS AGAINST THE PLAINTIFFS

Each of the defendants commenced an action against one or more of the plaintiffs prior to the filing of these bankruptcy cases. Those pre-bankruptcy state actions are summarized in the Complaint and also in a table at Exhibit B to the Complaint. Documents indicating the defendants' requests for relief in those actions are attached as Exhibits C through I to the Complaint. Each of the state actions is pending in a state judicial or administrative forum, other than Indiana where the matter is pending in a federal district court.

As the plaintiffs acknowledge in the Complaint, the defendants "allege wrongdoing primarily related to unfair or deceptive trade practices and also including telemarketing violations" and that the recording of memoranda or other documents relating to the HBAs "unfairly or deceptively interferes with the homeowner's ability to sell the home or access financing with respect to their homes." In the state actions, the defendants seek a variety of relief including: rescission of the HBAs and recorded documents and related declaratory relief; discharge of liens; permanent injunctions against enforcement of existing HBAs and creation of new HBAs; injunctions relating to marketing of HBAs; cancellation of the relevant plaintiff's corporate formation; disgorgement of profits; civil penalties; restitution to consumers; dismissal of pending lawsuits by plaintiffs against consumers; and fees and costs. In Ohio, the state action is brought by the Division of Real Estate and Professional Licensing and the relief requested is limited to injunctions against the unlicensed practice of real estate and the execution of agency agreements not in accordance with Ohio law. In addition to the plaintiffs, state actions in New Jersey, Pennsylvania, Ohio, Florida, North Carolina, Indiana, and North Carolina seek relief against certain of the plaintiffs' officers and persons affiliated with the plaintiffs as real estate agents. Only Massachusetts seeks relief solely against relevant plaintiffs.

Prior to these bankruptcy cases, Massachusetts, North Carolina, Ohio, and Florida sought preliminary injunctions in their state actions. Florida's request for preliminary injunction is stayed pending this Court's ruling in the present adversary proceeding.

On August 1, 2023, an agreed preliminary injunction was entered in the Ohio action that enjoins the relevant plaintiff and certain associated individuals from practicing real estate law while unlicensed, from allowing, encouraging, or promoting the unlicensed practice of real estate by their officers or employees, from entering into HBAs or any other "right-to-list home sale agreement," and from using real estate listing agreements and/or agency agreements that do not comply with Ohio law.

In February 2023, Massachusetts obtained an order enjoining the relevant plaintiffs from marketing HBAs in certain ways, originating new HBAs secured by a mortgage, exercising a power of sale in any mortgage, entering into new HBAs without complying with certain restrictions, and collecting certain administrative fees. The order directed the relevant plaintiffs to remove all mortgages previously filed in Massachusetts and this was accomplished prior to the filing of these bankruptcy cases.

In August and September 2023, North Carolina obtained orders enjoining the relevant plaintiffs from recording any memoranda relating to an HBA, claiming any lien, and pursuing any termination fee, liquidated damages, or other penalty, among other restrictions. The North Carolina court ordered termination of all recorded memoranda and lis pendens relating to HBAs. Under the North Carolina preliminary injunction, the relevant plaintiffs retain the right to collect a real estate commission and administrative fees for actual services rendered in certain circumstances and may pursue legal action or arbitration to recover damages for breach of an HBA in certain circumstances. However, upon learning of the filing of these bankruptcy cas...