White v. WCP Fund I LLC (In re ETS of Wash., LLC)

In re: ETS of Washington, LLC, Debtor.

William D. White, Chapter 7 Trustee, Plaintiff, v. WCP Fund I, LLC, 1Sharpe Opportunity Intermediate Trust, and DP Capital, LLC Defendants.

No. 20-00397-ELG

Adv. Pro. No. 21-10005

United States Bankruptcy Court, District of Columbia

January 14, 2022

MEMORANDUM DECISION AND ORDER DENYING IN PART AND GRANTING IN PART DEFENDANTS' MOTION TO DISMISS

ELIZABETH L. GUNN U.S. BANKRUPTCY JUDGE

On February 20, 2021, ETS of Washington, LLC (the "Debtor") filed its Complaint (ECF No. 1) initiating the instant Adversary Proceeding. On February 24 2021, WCP Fund I LLC ("WCP"), 1Sharpe Opportunity Intermediate Trust ("1Sharpe"), and DP Capital LLC ("DPC") (collectively, the "Defendants") filed their Motion to Dismiss Adversary Proceeding pursuant to Federal Rule of Civil Procedure 12(b)(6) (ECF No. 5) (the "Motion to Dismiss"). The Court heard initial arguments on the Motion to Dismiss from the Defendants and the Debtor on May 3, 2021, but deferred a full hearing on the Motion to Dismiss due to the pending motion to convert the Debtor's underlying bankruptcy case from chapter 11 to chapter 7, the conversion, and the appointment of a chapter 7 trustee. On October 20, 2021, the Court held a hearing (the "Hearing") on various pleadings, including a further hearing on the Motion to Dismiss at which the chapter 7 trustee was present. At the Hearing, the Court issued an oral ruling on the Motion to Dismiss, finding Counts I, II, and III of the Complaint sufficient to withstand a motion to dismiss, but dismissing without prejudice, and with leave to amend, Counts IV and V. This Memorandum Decision and Order memorializes the findings of fact and conclusions of law as set forth by the Court at the Hearing.

Background^[1]

A. Procedural Background

Prior to commencing the instant Adversary Proceeding, on September 28, 2020 the Debtor filed a voluntary petition for relief under to Chapter 11 of Title 11 of the United States Code, 11 U.S.C. §§ 101-1532 (the "Bankruptcy Code").^[2] Case No 20-00397-ELG (the "Main Case") ECF No. 1. The Defendants filed a Motion to Convert Case to Chapter 7 (Main Case ECF No. 107) on May 10, 2021 in the Debtor's main case, and after an evidentiary hearing, on May 24, 2021 the Debtor's case was converted to chapter 7. As more fully set forth in this Court's Memorandum Opinion dated September 23, 2021, at the hearing held August 11, 2021, the Court ruled that after a contested chapter 7 trustee election, William White should continue in the Debtor's as the chapter 7 trustee and, correspondingly, as plaintiff herein. After resolution of the chapter 7 trustee election, the Court provided the chapter 7 trustee an opportunity to respond to the Motion to Dismiss in this adversary proceeding and set the matter for a further hearing.

B. Adversary Proceeding Factual Background^[3]

In April 2019, a related company of the Debtor purchased a property in Virginia from WCP, with funding provided by WCP. Compl. at ¶ 4, ECF No. 1. Following the purchase, that same month, WCP "sought out" the Debtor with another development opportunity, this time for property that WCP had foreclosed upon located at 2207 Foxhall Road NW, Washington, D.C. 20007 (the "Property"). Id. at ¶ 5. The Property was advertised to the Debtor and others with development plans and the phrase "All Permits Secured." Id. at ¶ 6. In an email, a representative of ETS stated that the project had "nearly all approved plans," showed permits received, and provided an estimated after-renovation value of $4.8 million. Id. at ¶ 8. The WCP representative further stated that the sole remaining permit needed to commence renovations to the Property was that for storm water management which it was "waiting on . . . DOEE [D.C. Office of Energy & Environment] to approve," and that this permit was the "easiest approval to get" such that it would only take two weeks to obtain. Id. at ¶¶ 8, 13.

On May 21, 2019, the Debtor entered into a sales contract for the purchase of the Property (the "Sales Contract") from WCP, which required a $320, 000 cash down payment and $1.48 million in financing from WCP. Id. at ¶ 9. WCP "pressed" the Debtor to provide a $50, 000 deposit by June 5, 2019, with an initial proposed closing date in June 2019. The Debtor relied upon the June 2019 proposed closing date in soliciting investors for the project. Id. at ¶¶ 9, 11. However, despite timely payment by the Debtor of the deposit, the closing on the Property did not occur until July 18, 2019, approximately 40 days late. Id. at ¶ 11. At closing, the Debtor paid an additional $336, 104.39 in cash, including funds the Debtor obtained from unidentified investors. Id. As part of the purchase, the Debtor incurred closing costs of more than $118, 000. Id. At closing, the Debtor entered into three separate loans with the Defendants, including a loan for purchase and a construction loan for the development of the Property. Id. at ¶ 10. Although the Complaint is inconsistent as to the actual amounts, what is clear is DP Capital, LLC was paid a purchase price of $1.8 million at closing. Id.

Following closing, the Debtor alleges that it then discovered WCP had misrepresented the status of the storm water management permit from DOEE, "effectively invalidat[ing] the development plan." Id. at ¶ 16. The Debtor further alleges that WCP failed to disclose that the previous owner of the Property had been unable to secure another necessary permit from the District of Columbia Department of Transportation Urban Forestry Division ("UFD") due to the presence of Heritage Trees^[4] on the Property, which was necessary for the approval of a storm water management permit, thus rendering the project unbuildable in the manner as advertised. See id. The Debtor alleges that the inability of the previous owner to obtain the same permits ultimately resulted in WCP's foreclosure on the Property prior to seeking out WCP's purchase. See id. at ¶¶ 13, 16.

Due to the issues raised by the Heritage Tree and the resulting lack of the storm water permit, just like the previous non-WCP owner, the Debtor has been unable develop the Property utilizing the plans supplied by WCP as advertised. Id. at ¶ 16. To try and find an alternative development possibility, the Debtor paid to have the Property redesigned to avoid the Heritage Tree issue (in order to qualify for a storm water permit), but the redesign did not provide what the Debtor characterized as an "economically viable option." Id. at ¶ 20. The onset of the COVID-19 pandemic created further troubles for the Debtor's attempt to obtain a permit (of any sort) related to the Heritage Tree and ultimately redevelop the Property. Id. at ¶ 21.

Seeking to avoid further financial hardship and relying on D.C. Code § 42-3191.01^[5], in April 2020 the Debtor requested WCP provide it with mortgage payment relief. Id. at ¶ 22. In response, WCP stated that it required the Debtor to be current on its mortgage payments in order to qualify for relief. Id. The Debtor was current on its payments. Id. WCP then conditioned any payment relief on withholding draws from the construction loan and requiring that any such relief be contingent on the Debtor's continued payments on a separate property located in Virginia owned by a sister entity. Id. at ¶ 23. However, despite these stated conditions, WCP failed to provide the Debtor with instructions or procedures to obtain mortgage relief. Id. at ¶ 24. The Debtor was unable to obtain mortgage relief from WCP and was unable to draw funds from the construction loan due to the inability to begin construction. Id. at ¶ 25. As a result, the Debtor stopped making mortgage payments on the Property in late spring 2020. Id. On September 1, 2020, DPC^[6] issued a Notice of Foreclosure on the Property, with the foreclosure to take place on September 29, 2020. Id. at ¶ 26. On September 28, 2020, the Debtor filed for relief under chapter 11 of the Bankruptcy Code to stop the foreclosure. Id.

C. Defendants' Motion for Relief

On January 23, 2021, in the Debtor's Main Case, the Defendants filed a Motion for Relief from the Automatic Stay as to the Property (Main Case ECF No. 47) (the "Motion for Relief"), seeking relief for cause pursuant to § 362(d)(1).^[7] In support of the Motion for Relief, the Defendants cited to the Debtor's failure to make any post-petition payments necessary to provide adequate protection to the secured lenders. Mot. Relief at 3-4, ECF No. 47. After a two-day evidentiary hearing, the Court granted the Defendant's Motion for Relief and entered an Order Granting the Motion for Relief (ECF No. 59), finding that Defendants had a colorable claim in the Property, the Property was undersecured, and the lack of adequate protection entitled the Defendants to relief. The Defendants foreclosed on the Property in May 2021.

D. Complaint & Motion to Dismiss

The Complaint alleges five counts against the Defendants: Count I - Fraud in the Inducement; Count II - Negligent Misrepresentation by the Defendants; Count III - Violation of Mortgage Relief Law^[8] (the "Mortgage Relief Law"); Count IV - Slander of Title; and Count V - Breach of Duty of Good Faith and Fair Dealing. The Defendants timely filed their Motion to Dismiss, arguing that each of the five counts contained in the Complaint lacked merit and seeking relief under Federal Rule of Civil Procedure 12(b)(6) (the "Civil Rules"), made applicable by Federal Rule of Bankruptcy Procedure 7012 (the "Bankruptcy Rules"). On April 23, 2021, prior to the conversion to chapter 7, the Debtor filed its Opposition to the Motion to Dismiss (ECF No. 14).

On April 27, 2021, the Defendants filed their Reply in support of the Motion to Dismiss. (ECF No. 16). Due to the pending conversion and...