Valhalla Inv. Props., LLC v. 502, LLC

456 F.Supp.3d 939

VALHALLA INVESTMENT PROPERTIES, LLC, Plaintiff,

v.502, LLC; William E. Kantz, Jr. and John Bradford Scarbrough, Defendants.

No. 3:19-cv-00318

United States District Court, M.D. Tennessee, Nashville Division.

Filed April 27, 2020

Scott D. Johannessen, Law Offices of Scott D. Johannessen, Nashville, TN, for Plaintiff.

Christopher B. Holleman, Law Office of Brad Scarbrough, PLC, Brentwood, TN, for Defendants.

MEMORANDUM OPINION

WAVERLY D. CRENSHAW, JR., CHIEF UNITED STATES DISTRICT JUDGE

In Norse mythology, Valhalla is a great hall where slain warriors are received.¹ If the English playwright Edward Bulwer-Lytton was correct in RICHELIEU that "the pen is mightier than the sword,"² then Plaintiff – through its verbose and invective-laden filings – has made every effort to meet that metonymic adage, thereby securing its place in a great hall. That great hall, however, would not be the one for warriors slain in battle, or great writers. It would be the extremely crowded hall reserved for former business partners whose relationship has soured, and who have subsequently learned to hate each other.

Now before the Court is Defendants' Motion to Dismiss (Doc. No. 65) on the grounds that the Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. § 1562 et seq. , claim set forth in Count One of the Second Amended Complaint fails to state a claim upon which relief can be granted. This relatively straightforward issue (and the even simpler question of whether a foreign LLC has standing to bring suit on state law claims without a certificate of authority in direct violation of Tenn. Code Ann. § 48-245-601(a) ), has led to more than 70 pages of briefing (Doc. Nos. 65, 66, 74, 75 & 78-1). Because this case boils down to a simmering business dispute that is not covered by the FDCPA, the Motion to Dismiss will be granted.

I. Factual Allegations

The relevant factual allegations from the 160-paragraph, 40-page Second Amended Complaint and its 11 attachments can be summarized for present purposes as follows:

Valhalla is a Delaware limited liability corporation,³ as is Flex Yield Investments, LLC ("FYI"). FYI's members are Valhalla, William E. Kantz, Jr., and Henry S. Hood. (Doc. No. 63, Amended Complaint ¶¶ 4-6). On March 12, 2009, FYI's three members entered into an operating agreement ("Operating Agreement") under which FYI could perform certain actions, including the sale, acquisition, transfer or encumbrance of real estate; enter into contracts; and issue promissory notes or other debt security. (Id. at ¶¶ 15-16, 18.)

502, LLC is a Tennessee limited liability company that was formed in October 2018 by Kantz and John Bradford Scarbrough, both of whom are citizens of Tennessee. The sole and managing member of 502 LLC is Kantz. (Id. at ¶ 8). Scarbrough is a lawyer who has represented Kantz in various matters.

Pursuant to its Operating Agreement, FYI purchased two condominiums, consisting of Units 502 and 503, located at 110 31st Avenue in Nashville, Tennessee. Kantz resided in Unit 502, while Unit 503 was earmarked as a rental unit.

In January 2012, Kantz wanted to sell Unit 503 because he was facing financial difficulties related to an ongoing custody and child support battle he was litigating. He also needed to pay off a personal loan owed to First Bank that was set to mature in August 2012. (Id. at ¶ 20). After some persuasion, FYI's two other members agreed with Kantz to sell Unit 503, provided, however, that all three members "honored the Unanimous Consent Agreement," which required that there be written consent of all FYI members with respect to any condominium-related transaction. (Id. at ¶ 21).

By February 2013, Kantz was still in desperate need of money because of the custody dispute, his need to defend against a lawsuit filed by First Bank, and his obligation to make monthly payments on loans from Bank of America and First Tennessee Bank. (Id. at ¶ 22). Recognizing Kantz's need for capital, Hood and Valhalla agreed to secure a First Bank loan so FYI could borrow money. Kantz could then use the proceeds to pay off some of his debts, and Hood and Valhalla would benefit by obtaining funds for their own personal use. (Id. at ¶ 23).

In accordance with the Unanimous Consent Agreement, FYI authorized debt funding and the recording of a security interest against Unit 502 in exchange for the loan from First Bank. Those funds were to be divided equally among FYI's members. It is unclear from the Second Amended Complaint how much money was borrowed from First Bank, but by mid-May 2013 only about $15,000 was remaining in FYI's bank account, which was the amount held back by First Bank in the case of a default under the loan. (Id. ).

Notwithstanding the influx of cash from First Bank, Kantz's financial problems continued. He "repeatedly tried to buy and/or sell Unit 502 and, with respect to Valhalla and Hood, buy and/or sell each of their respective FYI member interests at substantially reduced and below market prices, i.e., ‘fire sale’ prices.’ " (Id. at ¶ 27). Those efforts were rejected by FYI.

At some point after the Unit 502 transaction involving the First Bank loan, Kantz's personal home was foreclosed upon by the holder of the Bank of America debt, and he was sued for collection on his First Tennessee debt. He was also served with a detainer warrant to dispossess him of the house he lost to foreclosure. (Id. at ¶ 28).

Meanwhile, the balance on the First Bank debt purchased by FYI had ballooned from approximately $55,000 to approximately $150,000, during which time Kantz became increasing "short-tempered and incensed with Hood and Valhalla." (Id. at ¶¶ 29-30). In fact, since the Fall of 2017, Kantz refused to allow FYI to rent out Unit 502 to a tenant. This, in turn, led to a negative cash-flow for FYI because monthly rental payments were FYI's only income. It also resulted in approximately $70,000 in lost income, which required Hood and Valhalla to loan certain amounts to FYI in order to make monthly payments toward the First Bank loan, pay property and state taxes, and cover monthly homeowner association dues for Unit 502. Meanwhile, Kantz contributed nothing. (Id. ¶ 31).

The infusions of cash from Hood and Valhalla were not enough to keep FYI afloat and the First Bank loan current. Thus, in the spring of 2018, Hood and Valhalla agreed to have FYI sell or lease Unit 502 through a licensed real estate agent, and those two, along with Kantz, agreed on a $650,000 sales price. (Id. ¶ 32). However, any sale was conditioned on (1) Kantz verifying a trust that he had utilized in the past,⁴ and (2) the proceeds being properly accounted for and distributed in accordance with applicable IRS rules and regulations. Kantz refused both conditions, prompting Valhalla to withhold its consent to a sale in accordance with the Unanimous Consent Agreement. (Id. ¶¶ 31-32). As a consequence, Unit 502 did not sell before the First Bank loan went into default and foreclosure proceedings were initiated.

In August 2018, FYI and each of its members received notice that the First Bank loan was in default. They were also informed that a foreclosure sale was scheduled for October 15, 2018. (Id. at ¶ 34-35). In September 2018, all of FYI's members agreed that Unit 502 could be sold to an "existing ready, willing and able buyer," and Kantz prepared a "unanimous consent resolution" which all three FYI members signed. (Id. at ¶¶ 36-37). Nevertheless, Kantz did nothing to sell the unit. Instead, he decided to use Scarbrough, his friend and attorney, to help him sell Unit 502 to a surrogate at the foreclosure sale, without Hood's or Valhalla's informed consent. (Id. at ¶ 37). This conflicted FYI's desire to pay off the First Bank loan using the member advances they had previously received. (Id. at ¶ 38).

By the time of the foreclosure sale date, Unit 502 had been vacant for more than a year as a result of "Kantz's "obstinance and obstruction." (Id. at ¶ 39). To stave off the sale, FYI filed for Chapter 11 bankruptcy on October 18, 2018. The bankruptcy case was closed on March 12, 2019 after Kantz and FYI agreed that Valhalla could pursue any claims it had in state or federal court. (Id. at ¶ 56).

While the bankruptcy case was pending, and unbeknownst to Valhalla, Kantz formed 502, LLC, with the help of Scarbrough. (Id. at ¶ 46). During this period, Kantz also raised enough money from third parties to purchase Unit 502 at its fair market value. Thereafter, 502, LLC, purchased the defaulted Tennessee First Bank loan, acquired the deed of trust securing Unit 502, and set out to force a foreclosure sale. The sale took place on April 22, 2019, and Unit 502 was purchased for $530,000.00, which allegedly was $120,000.00 below market value. (Id. at ¶¶ 58-62). This occurred even though before the foreclosure, "FYI had a legitimate offer from a verified third party, with proof of funds, to purchase Unit 502 for $600,000." (Id. at ¶ 63).

Since the foreclosure, "Defendants have had control over the Unit 502 sale proceeds, but it is anyone's guess what's left." Also open to question is the balance of Kantz's debt to FYI, and the balance of the FYI members accounts." (Id. at ¶ 65). This is because, after 502 LLC was formed, "Kantz, using Scarbrough and 502 LLC as his facilitators, enablers and surrogates, took complete control of FYI's assets (including FYI's bank accounts) and liabilities without Valhalla's consent or its knowledge of 502 LLC's existence." (Id. at ¶ 52). Valhalla has not had access to the proceeds of the sale or any of FYI's records, nor has it received an accounting or been allowed to inspect records, despite repeated requests. (Id. at ¶¶ 65, 157-159).

II. Standard of Review

The standards governing motions to dismiss are well-known and the subject of countless decisions, making it unnecessary and fruitless in most cases to repeat them. Because, however, Valhalla repeatedly takes Defendants to task for allegedly ignoring those strictures (see e.g., Doc....