River City Resort, Inc. v. Frankenberg (In re River City Resort, Inc.)

In re: RIVER CITY RESORT, INC., Debtor;RIVER CITY RESORT, INC., and B. ALLEN CASEY, JR., Plaintiffs, v. PAUL FRANKENBERG, III, and S. JACKSON WINGFIELD, III, Defendants.

No. 14-10745

Adversary Proceeding No. 14-01027

Adversary Proceeding No. 14-01028

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF TENNESSEE SOUTHERN DIVISION

SIGNED: July 24, 2014

__________

Shelley D. Rucker

UNITED STATES BANKRUPTCY JUDGE

Chapter 11

Appearances for the Debtor River City Resort, Inc.

David J. Fulton, Esq.

Scarborough, Fulton & Glass

Appearances for Paul Frankenberg, III

Harry R. Cash, Esq.

Grant, Konvalinka and Harrison

Steven F. Dobson

Burnette, Dobson & Pinchak

Appearances for S. Jackson Wingfield, III

Barry L. Abbott, Esq.

Cavett & Abbott

Scott M. Shaw, Esq.

Evans Harrison Hackett, PLLC

MEMORANDUM

On December 30, 2005, Paul J. Frankenberg, III ("Frankenberg") commenced an action in the Chancery Court of Hamilton County, Docket No. 05-1271, naming debtor River City Resort, Inc. ("Debtor" or "RCR") and B. Allen Casey ("Casey") as defendants ("Contract Case"). [Adv. Proc. No. 14-1027, Doc. No. 1-1]. In the Contract Case, Frankenberg soughtrecovery of compensation for services rendered to RCR as an officer and damages against RCR and Casey for breach of a settlement agreement, which required the settlement obligations to be secured by security interests in some or all of RCR's property. He also requested an attachment of the property of RCR to secure any judgment. Before the Contract Case had been heard, on June 13, 2012, Frankenberg filed a second case in the Chancery Court of Hamilton County, Tennessee, against RCR and Casey, Docket No. 12-0032, and added S. Jackson Wingfield ("Wingfield") and River House Trust, LLC ("River House") as defendants ("Fraudulent Transfer Case"). [Adv. Proc. No. 14-1028, Doc. No. 1-1]. In the Fraudulent Transfer Case, Frankenberg alleged that, in 2008, RCR and Casey had transferred three lots of real property owned by RCR or a subsidiary for less than reasonably equivalent value while RCR was insolvent with the intent to defraud RCR's creditors. Contract Case Complaint, ¶¶ 19-22. Based on his status as a creditor of RCR, Frankenberg claimed that the transfer was fraudulent and should be avoided. If the transfer were avoided, he also contended that his claims should be protected by a lien on the real property in order to fulfill the promises made to him by Casey and RCR. These two cases were to be tried together in Chancery Court in July of 2014.

On February 24, 2014, RCR filed a Chapter 11 voluntary petition. [Bankr. Case No. 1410745, Doc. No.1]. Two days later, Casey filed a voluntary Chapter 7 petition. See [Bankr. Case No. 14-10778, Doc. No. 1]. Richard P. Jahn was employed as trustee, but due to a conflict, was later replaced by Douglas R. Johnson on May 29, 2014. [Bankr. Case No. 14-10778, Doc. No. 70]. On March 19, 2014, RCR and Casey filed an adversary proceeding against Frankenberg and Wingfield and a Notice of Removal removing the Contract Case to this court. [Adv. Proc. No. 14-1027, Doc. No. 1] ("Contract Proceeding"). That same day RCR and Casey filed a second adversary proceeding against Frankenberg and Wingfield removing the Fraudulent Transfer Caseto the bankruptcy court. [Adv. Proc. No. 14-1028, Doc. No. 1] ("Fraudulent Transfer Proceeding").

On April 14, 2014, Wingfield filed a Motion for Remand in each adversary proceeding. Although Wingfield was named in only the Fraudulent Transfer Case in Chancery Court, he received a summons and a copy of the Contract Proceeding Complaint and has responded out of an abundance of caution. See [Doc. Nos. 8, 10, 12]. The court heard oral argument on May 22, 2014 on the motions ("Remand Hearing"). As to the Contract Proceeding, the Debtor challenges Wingfield's standing to file a motion for remand. As discussed below, the court finds that the proceedings are closely related and finds the motions should be addressed together. The success of the Fraudulent Transfer Proceeding is dependent upon a finding in the Contract Proceeding that Frankenberg was a creditor at the time of the transfers. To the extent that the court finds that the Fraudulent Transfer Proceeding must be remanded, it will exercise its discretion and remand the Contract Proceeding in the interests of judicial economy and in order to prevent inconsistent verdicts. Therefore, the court does not find it necessary to address the issue of Wingfield's standing to request remand in the Contract Proceeding.

These remand motions present the court with the issue of whether this court should hear these proceedings even if it cannot enter a final order. Both proceedings are clearly related to RCR's prepetition business and will determine the amount of a large claim in the bankruptcy estate. RCR argues that the resolution of these proceedings may have a significant impact on what assets will be available to all creditors, and this court should therefore be the court to hear the proceedings. On the other hand, the proceedings also involve long-standing claims governed by state law which could be heard promptly in the state court. Wingfield argues that theseproceedings should be handled by a court that can both hear and determine all of the parties' claims and defenses.

The bankruptcy court's jurisdiction to hear and determine "Stern claims," i.e., matters listed as core in 28 U.S.C. § 157(b)(2), but which require adjudication by an Article III judge, has just been reviewed by the United States Supreme Court. See Executive Benefits Ins. Agency v. Arkison (In re Bellingham), 134 S.Ct. 2165 (2014). As the Supreme Court recently held, in a "Stern claim," which includes a fraudulent transfer claim, this court may only propose findings of fact and conclusions of law, and the resolution of the proceedings will be subject to de novo review by the district court. Both parties are seeking the most efficient and prompt resolution of their disputes, although they disagree about which court is best-suited to offer that resolution. This court concludes the claims in both proceedings should be remanded with limited reservations.

For the reasons stated in the following findings of facts and conclusions of law made pursuant to Fed. R. Bankr. P. 7052, the court will GRANT in part, and DENY in part the motion for remand in the Contract Proceeding. The court will GRANT the motion for remand in the Fraudulent Transfer Proceeding.

I. Facts

A. The Contract Case Allegations

1. Wage Claim

As described above, Frankenberg alleged in the Contract Case complaint that he was an employee of the RCR and was owed sums for past labor and services performed on behalf of RCR. [Adv. Proc. No. 14-1027, Doc. No. 1-1, ("Contract Case Complaint"), ¶ 2]. He claimed that RCR owes him $268,181.81 for bonus and severance payments. Id. at ¶ 3. Frankenberg fileda Notice of Lien against all property of the Debtor in the Register's Office of Hamilton County, Tennessee. Id. at ¶ 5. He alleged that the RCR breached the employment contract it made with him and that he was thus entitled to a lien pursuant to Tenn. Code Ann. § 66-13-101. Id. at ¶ 6. At the Remand Hearing, Frankenberg's counsel stipulated that his client's lien claim for wages had been dismissed pursuant to a dispositive motion heard by the Chancery Court. Frankenberg appealed the dismissal to the Tennessee Court of Appeals, and the appellate court affirmed the dismissal of the lien claim on the basis that Frankenberg was an officer and not an "employee" under the statute. See Frankenberg v. River City Resort, Inc., No. E2012-01106-COA-R3-CV, 2013 WL 3877617 (Tenn. Ct. App. Apr. 11, 2013). The Tennessee Supreme Court denied permission to appeal on October 28, 2013. See id. Frankenberg's counsel stated at the Remand Hearing that Frankenberg was no longer claiming a lien in all of RCR's property based on Tenn. Code Ann. § 66-13-101.

2. Breach of Settlement Claims

In addition to the wage lien claim, Frankenberg alleged that in the three months prior to the filing of the Contract Case Complaint, there were other claims that the parties settled for $437,988.92 as outlined in a settlement agreement ("Settlement Agreement") that was filed with the Contract Case Complaint. Contract Case Complaint, ¶ 7; [Adv. Proc. No. 14-1027, Doc. No. 1-1, Ex. A, pp. 8-13, Settlement Agreement]. The Settlement Agreement required RCR to execute a note dated November 20, 2005 in the principal amount of $187,988.92 that bore interest at ten percent and was due and payable in full on December 28, 2005 ("Note 1"). Contract Case Complaint, ¶ 8; [Adv. Proc. No. 14-1027, Doc. No. 1-1, Ex. A, p. 19]. It also required RCR to execute a second note on November 20, 2005 in the amount of $250,000 bearing interest of 10% a year payable monthly ("Note 2"). [Adv. Proc. No. 14-1027, Doc. No.1-1, Ex. A, pp. 22-23]. The entire amount under the Note 2 was due on March 28, 2006. Casey personally guaranteed Note 1 and Note 2. Settlement Agreement at ¶ 9. Frankenberg contended that the Settlement Agreement provided that both Notes 1 and 2 would be secured by a lien on property of RCR and that the parties would execute such documents necessary to effect such a transaction. He further asserted that Casey refused to execute a deed of trust required by the Settlement Agreement. Contract Case Complaint, ¶ 10.

An "Addendum to Settlement Agreement," also filed with the Contract Case Complaint, provided that Notes 1 and 2 were to be secured by a security interest and lien upon real estate known as 424 Manufacturers Road Lots 1 and 4. Id. at p. 12. The Settlement Agreement stated that the lien upon Lot 4 was contingent upon a determination that Lot 4 was unencumbered. [Adv. Proc. No. 14-1027, Doc. No. 1-1, pp. 12-13]. In addition, the Notes were to be secured by a second position security interest in real estate known as 430 Manufacturer's Road Lot 5. Lots 4 and 5 are property of the RCR bankruptcy estate.

3. Requested Relief

The Contract...